With the recovery in economic activity and company earnings, First Capital expects an upward trend in the market supported by stronger market multiples. The heavy tax cuts and the policy rate cut is likely to be an added boost for company earnings.
Considering the mid-term positive impact, we upgrade our equity exposure to 100% while maintaining our ASPI expectations for Jun 2020 at 6,500, assuming Market PER to be in the range of 8.5x – 9.5x. However, we upgrade our ASPI target of Dec 2020 to 7,500 from the previous 7,000 amidst the added boost to the economy, according to First Capital Equity Strategy - Jan 2020.
With the strong market valuation but weak external environment with high interest rates, political uncertainty and uncertainty in the global markets, Sri Lanka equity market started the year off on a weak note as First Capital Research recommended only an equity exposure of 60% while recommending maintain cash at 40%. However, as valuations further improved, and market interest rates saw a sharp fall, we gradually upgraded our equity exposure targets.
Market reversed its heavy downtrend in May 2019 and registered strong uptrend which lasted up to the end of the year erasing all loses during the year to register a marginal +1% gain for 2019.
Following the Presidential Election and appointment of the new Cabinet, the political uncertainty which prevailed for an extended duration eased, providing stability and policy certainty for investors. It has also given a major boost to business confidence as the LMD-Nielsen business confidence index jumps to a 51-month high of 186 for Dec 2019.
On November 27, 2019, Government announced hefty tax reliefs, reducing VAT to 8% (from 15%), removing of NBT and revising PAYE tax with the expectation of increasing the consumer spending while boosting the economic growth of the country.
As an extension to the stimulus package, Govt. took measures to remove DRL on banks and NBFIs and revise downwards the corporate tax rates across all sectors. Further, supporting Govt.’s efforts to revive growth, CBSL on January 30 took to cut policy rates by 50bps despite credit growth accelerating in November and Dec ember 2019.
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