Sri Lanka Stocks to Extend Gains

Sri Lankan stocks will extend Asia’s third-best performance this year, surging a further 26 percent in 2010 as corporate earnings rebound, according to First Guardian Equities.

The Sri Lanka Stock Market Colombo All-Share Index may rise to 5,000 by the end of this year, Ranjan Hulugalle, director of equities at First Guardian, said in an interview with Bloomberg Television.

The gauge rose 0.1 percent to 3,960.57 at 1 p.m., set for a record close. The benchmark index has climbed 17 percent this year, lagging behind only Mongolia and Bangladesh in the region.

Sri Lankan stocks more than doubled in 2009 after government forces crushed the Liberation Tigers of Tamil Eelam, ending a three-decade-long civil war and increasing confidence in economic and corporate earnings growth.

“The market has a long way to go, we’re just starting the cyclical recovery and you couple that with the secular trend in Sri Lanka, which is the peace dividends that will be coming,” Hulugalle said today. “The earnings recovery is only just getting started.”

Sri Lanka’s economy is forecast by the central bank to grow by 6.5 percent in 2010, the fastest pace in three years, led by a construction spree and higher farm output and tourism receipts. President Mahinda Rajapaksa, who led his party to a sweeping victory in parliamentary elections last week, has pledged to spend $1 billion annually on ports and roads.

Mark Mobius

Mark Mobius, who oversees about $34 billion in emerging markets funds as chairman of Templeton Asset Management Ltd., said in late January he’s “not rushing in” to buy Sri Lanka’s stocks as “there’s a lot to be done.” San Mateo, California-based Templeton doesn’t hold any Sri Lanka stocks, which need to drop at least 15 percent to be attractive, he said at the time.

John Keells Holdings, the country’s biggest diversified company, in January reported third-quarter net income surged to 1.14 billion rupees from 764.9 million rupees a year earlier. “When you have the biggest companies in Sri Lanka showing year-over-year earnings growth of 50-plus percent, when you have companies that were making significant losses before, swinging to significant profitability, the turn is just coming and there’s significant upside left,” Hulugalle said.

First Guardian data shows that the stocks on the Colombo bourse are trading at about 20 times reported earnings, he said. That prices them in line with Indonesia and more expensively than all Asian markets apart from China, Taiwan and India. “When you have an earnings picture that is just changing so rapidly, 2010 is going to look nothing like 2009 data,” he said. “That will alter the price-earnings significantly.” Once March earnings are reported, “you’ll see it’s not that expensive,” he said. First Guardian’s stock selections include John Keells, Lanka Milk Foods (CWE), Richard Pieris & Co. (Bloomberg)