Market to be rerated towards elections: First Capital Research

The market is expected to be rerated towards the election, according to First Capital Research, as investors are likely to adjust their overall valuations during that period.

“Elections typically generate significant business activity and government spending, which can support growth and corporate earnings,” the report noted.

Sri Lanka is set to face its first election since announcing a default on external obligations in April 2022, which led to shortages of essentials and widespread protests.

The upcoming presidential election is considered crucial as Sri Lanka aims to begin a new phase of economic growth following debt restructuring and the stabilisation of key economic indicators.

“With scales evenly balanced and no clear winner in the election race, we expect political uncertainty in the lead-up to the election to play a critical role over the next three months,” First Capital Research stated.

First Capital pointed out that while past elections in Sri Lanka have not inspired confidence, the current situation is different due to the country’s sensitive position.

“With doubts clearing, supported by the completion of the EDR and the related country rating upgrade, there may be significant factors driving the market towards the ASPI target of 13,500,” the report added.

Sri Lanka’s progress in debt restructuring, pending final approval from the IMF is expected to boost investor confidence.

According to First Capital Research, a potential rating upgrade from the current Restricted Default status is also anticipated to enhance confidence among both local and foreign investors. First Capital expects GDP growth and corporate earnings to strengthen in the second half of 2024, supported by lower interest rates and increased liquidity. Corporate earnings are projected to grow by 39 percent for 2024 and 16 percent for 2025.

With corporate earnings recovering, the Price-Earnings Ratio (PER) of the ASPI has fallen below 10x, offering a discount of approximately 20 percent to the historical average and 25.5 percent discount to the regional peer PER of 12.6x.