Sri Lanka’s recovery outlook seems well intact says First Capital Research

Sri Lanka’s recovery outlook seems well intact says First Capital Research

First Capital Research has reportedly stated that considering the dip in 2020, Sri Lanka’s recovery outlook seems to be well intact despite expectation of sluggish growth.
Sri Lanka’s state owned Daily News has reported that considering the shocks, First Capital 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 moves 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 five 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 five-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 has stated 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, First Capital 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 has stated.

OSL take:

Sri Lanka’s economy has shown great resilience through the years and is once again showing signs of a quick return to normalcy despite suffering from external and internal challenges posed by the global Covid 19 pandemic. Therefore Sri Lanka’s recovery from the Covid 19 impact is expected to be quicker than most countries. Sri Lanka’s geographical positioning in the Indian Ocean and the many trade agreements as well as trade concessions enjoyed by the country will undoubtedly help the country’s economy bounce back to normalcy this year.

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Article Code : VBS/AT/20210217/Z_4

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