FCR expects ASPI to hit 15,000 in first quarter amid strong earnings and negative real yields

• Says equities offer positive yields when inflation is running hotter
• But cautions pendulum could shift in case of a possible economic shock
• Central banks are more hawkish than ever as they battle to contain prices around the world 
• FCR advises investors to shift to defensive counters to mitigate potential risks

Independent research firm First Capital Research (FCR) is of the view that equities have significant upside in the near term due to the strong earnings spell and the continued negative yields, but cautioned investors to brace for a possible shock in the second half which could lead to a potential reversal in broader stock market returns. 
The research house estimated the current spell of robust earnings and the negative real interest rates would propel the All Share Price Index (ASPI) to 15,000-point level in the current quarter as investors would continue to collect shares which currently offer returns which beat inflation and fixed incomes returns. 
FCR has been accurate throughout last year in their forecasts on equities and, in fact, the equities over performed their estimates. Both the broader stock index and the index for most liquid stocks ended 80 percent and 60 percent higher last year, but the year-to-date performance has so far been volatile. 
The ASPI lost 300 points or 2.43 percent yesterday to close at 12,081.69 points while the S&P SL20 index ended at 4,052.58 shedding 113.02 points or 2.71 percent. 
Year-to-date, the broader stock gauge had lost 144.32 points or 1.18 percent while the S&P SL20 index gave up 180.67 points or 4.27 percent. 
Since the beginning of the year, the stock markets around the world lost their 2021 steam, with information technology companies which are considered as pandemic hi-flyers losing the most as investors grew skittish over the pace of the interest rate increases by the world’s most prominent central banks to contain decades high inflation. 
For instance Meta Inc., the parent company of Facebook lost nearly US$ 300 billion in market value last week when the social media behemoth plunged over 20 percent after reporting disappointing earnings and fresh challenges in growing users amid competition from relatively new entrants such as TikTok.  
In contrast, the Sri Lankan equities, according to FCR, have more room to run its course towards upside. Although the December quarter earnings season is underway, banks are yet to report their fourth quarter results, which are expected to be very strong after a year of record credit growth. 
“December 2021 quarter earnings are likely to be extremely strong similar to September 2021 with the transportation sector, construction and building material sector and diversified financials sector leading the way in terms of earnings.” FCR said. 

“We expect ASPI returns to be strong in the shorter term resulting in the ASPI potentially rising to the 15,000 mark within the 1Q2022,” they added. Nevertheless caveat remains. 
The research agency in the same vein asked investors to become more cautious, specially in the second half of the year due to what they call a, “possible economic shock”, triggering, “possible negative return in the broader market in 2H2022”. Their possible economic shock scenario is associated with the foreign debt repayment plan of the government amid the tight foreign exchange currency situation at present. “The weak environment could lead to a major depreciation in the currency and a spike in interest rates. Though import restrictions and rise in inflation are supporting growth in earnings, it is likely to be temporary in the face of the crisis”, FCR said.  Therefore, the research agency recommended the investors to reduce risk by aggressively shifting to defensive counters such as dollar income companies, life insurance companies, banks, and counters, which offer high dividend yields.  “For risk averse conservative investors who are unwilling to take economic shock, we would recommend to further reduce equity exposure. From our previous cash allocation of 50 percent, it would be wise to increase to 75 percent”, they added.