Lanka’s recovery outlook well intact - First Capital Research | Daily News

Lanka’s recovery outlook well intact - First Capital Research

Considering the dip in 2020, Sri Lanka’s recovery outlook seems to be well intact. But the sluggish growth is expected to continue, According to First Capital Research.

Sri Lanka’s surge in CBSL Holdings and foreign debt payment requirements may lead to a major depreciation in currency possibly leading to a spike in interest rates towards 2Q-2021, illustrating a “Bumpy road to Recovery”.

Considering the shocks, FC Research expects Sri Lanka to go through a W-shaped recovery as explained in Our September 2020 Mid-Year Outlook. Amid the possible shocks, we believe Sri Lanka to be in the second leg of “W”.

Pressure on bonds yields to rise from 1Q-2021 onwards, but rise may be slower due to higher liquidity, according to First Capital Research - Strategy Report 2021

With the rise in Government borrowing requirement, rising consumer demand and private credit, First Capital expects a gradual increase in pressure on bond yields during 1Q2021 and afterwards gradually move up further during 2021.

On a base case First Capital Research expects a stable policy environment up to June 2021 followed by policy rates reverting upwards with potential 2 policy hikes in 3Q/4Q.

Banking Rates (AWPR) to gradually trend upwards and readjust above the 5 year bond yield. “With the lack of credit, AWPR fell below the 5-year bond, breaking the historical trend of moving in line with the 5-year bond. As private credit picks up, AWPR may return to the historical trend. We expect the AWPR to have bottomed out and is likely to rise amidst competition for debt from Government and Private Sector as Private credit picks up. We expect AWPR to fall to a range of 6.5% -7.% by June-2021 and further move towards 7.%- 8.% by December-2021.”

Moreover, the report says that with the weak foreign currency reserve position, high foreign currency debt repayment and possible spike in consumer demand triggering higher imports are likely to result in a steep depreciation in 2021.

Accordingly, FC research expects the rupee to depreciate approximately .12.% during the year.

“We believe the market is attractive when the market trades below a forward PER of 14.0x-14.5x. In the Bull Run the ASPI has surged well over our expected fair value justifying a gradual reduction in equity portfolio.

Thereby, we raise our cash allocation in the equity portfolio to 10% from the previous 0%,” the report said.