Greetings for 2016

We just bid farewell to an eventful 2015 and looking forward to even more thrilling year, 2016. Here’s my very best wishes to all of the readers, from around the world, for a fantastic 2016. I would also like to thank every one of you for your continuous patronage shown towards LanakanMarkets over 2015 and I do hope to see same (or even more) level of support and interaction in this year.

Year in review: 2015

Colombo Stock Exchange (CSE)

CSE ended the year down 5.54% (All Share Index – ASI) and with a double digit dip in the S&P SL20 Index of 11.33%. Following corporate/other actions were noticed:

• Three Equity IPOs were concluded: (namely completion of Arpico Insurance PLC (AINS.N0000) listing, Singha Hospitals PLC (SINH.N0000) and lastly People’s Insurance PLC of which the listing yet be completed as of my writing). The three offers raised a combined c.LKR 1.08 billion (c. USD 7.5 million) from the public. SINH performed poorly as an IPO. It only jumped 12% at the debut and closed the year down 16%. In contrast, AINS was trading up 36% when it reached its highest price during the year and ended the year up 20%. People’s Insurance will debut in 2016 and it is likely to see a significant pop at the debut. (it is the only IPO which got oversubscribed in the first day after about 3 – 4 years);
• After about a 4 year break, another Closed-End Fund was listed on the CSE, namely Candor Opportunities Fund (COF.U0000) which raised c.LKR504 million (c. USD 3.5 million). On the inauguration it recorded an 8% hype though not sustained with volumes. Closed the year 5% below offer price;
• The public corporate bond market remained active as more and more companies tapped the market. A total of c. LKR83.5 billion (c.USD 579.61 million) was raised by 23 corporates. Interestingly, 84% of that was raised by Bank and Finance Sector companies while the balance was raised by Non-Bank corporates. In another event, the debentures that had been earlier issued by Urban Development Authority matured in October. Due to a conflict of interest issue, the Securities and Exchange Commission of Sri Lanka (SEC) suspended temporarily a debenture offering of EAP Broadcasting Company Limited;
• One of the Credit Rating Agencies, Lanka Rating Agency (formerly, RAM Ratings Lanka Ltd) were suspended by the SEC due to non-compliance. On the Sri Lankan Credit Ratings Industry I wrote several posts in this blog which you can search here: they were themed, Learn from the Past, Prevention is always better and lastly Now What; 
• CSE also adopted GICS towards the end of the year and will be parallel run until it is fully adopted in place of old classification; 
• The government, in its recent budget, removed the Share Transaction Levy (STL) whereby stocks trading on CSE will be 0.30% cheaper from 1 January 2016;
• Market PE was 17.98x, PBV 1.99x and Dividend Yield 2.18% by the end of the year; and
• S&P SL20 rebalancing took place in December, as usual.

CBSL policy

With the change in the political scene beginning in January, the Central Bank of Sri Lanka (CBSL) governor quit his job and a new Governor wasappointed. Before Long, in March 2015, the new Governor got himself entangled in a Bond Scam which I personally did not expect to see under a government which came to power pledging to bring in Good Governance and eradicate corruption. But, as usual things did not happen the way we wanted. I also wrote about my expectations in this post.

In terms of Monetary Policy, several decisions were implemented as pointed out below:

• In March, the Standing Deposit Facility rate of 5%, which was instituted under previous Governor, was removed by the CBSL;
• In April, the CBSL Policy Rates were reduced by 50 bps, a very unexpected move by the CBSL at the time, thereby bringing the SDFR and SLFR to 6.00% and 7.50% respectively; and
• Most recently, in December, the Statutory Reserve Ratio (SRR) was increased by 150 bps to 7.50%. This increase would affect the Banking Sector profitability, albeit not significantly.

There was no clear guidance from the CBSL in regards to the ongoing Consolidation of Financial Sector initiative that they carried out through 2014. The last communique in this connection was issued in 31 December 2014 and afterwards there was no any indication from the CBSL whether it was called off or still in operation. I would have expected them to come out and provide clear guidance to those companies which were forced by CBSL to merge. However, in the recent Budget of the Government they mentioned that companies are welcome to merge voluntarily.

Treasuries performance

Both primary and secondary market treasury rates moved up shifting the yield curve upward. The Primary bill rates increased significantly as reflected in the below table:

In the secondary market, the rates showed a similar fashion increase as evidenced by below table:

The yield curve signified a positive curve and an upward shift, though not a parallel shift. 

As reflected by the yield spread, it looks like that the investors are expecting interest rates to increase. The yield spread has increased to 3.93, a 1.58 increase compared to the beginning of the year 2015. 

LKR trajectory

2015 was not a good year for Sri Lanka Rupee (LKR). LKR showed significant depreciation against the US Dollar (USD) and Japanese Yen (JPY), 8.47% and 7.49% against USD and JPY respectively. A marginal depreciation of 3.71% against Sterling Pound (GBP) was witnessed while a 2.06% appreciation against Euro observed.

In terms of USD borrowings, Lanka borrowed closed to USD 7.5 billion via Sri Lanka Development Bonds (SLDBs), International Sovereign Bonds and Reserve Bank of India (RBI) Currency Swap Agreement. (Please note that this does not include other forms of borrowings by the government). The table below shows the issuances in chronological order:

The table shows each instrument’s tenure, amount raised and the interest rate. One noteworthy thing about the RBI Currency Swap facilities is that CBSL was not as transparent as it was with regard to SLDBs and International Sovereign Bonds of Government of Sri Lanka. Hence, it was quite tricky to find out exact periods on which they were utilized. However, from available information I assume that the first tranche of USD400 million was availed in April and the other USD1,100 million was made use in August. Going by the mechanics and as I posted in my articlehere, I also assume that the CBSL extended these facilities in August and December. (every three month tenure, purely my assumption). As of end of November 2015, the official gross reserves position stood at USD 7.3 billion compared to USD 8.8 billion by end of November 2014. 

My initiatives

Personally, I also took some initiatives to broad base the readership and to enhance my own excitement to blog more and more. Hence, as determined inthe beginning of 2015 I kept posting at a faster pace. Additionally, I have the LankanMarkets email which is active where you can directly send your feedback. [lankanmarkets@gmail.com]. Moreover, I have added social media widgets using which you can comment, share, and follow your favorite/interesting posts. The search button will allow you to search for anything that you want. The most popular posts are also organized for your quick access.

Final thoughts

As I always mention I do welcome your valuable comments/thoughts/ideas, either good/bad as it will help develop the blogging experience, for me for sure and hopefully for you as readers. Further, should you want any particular topic be discussed please do let me know as I’ll be happy to do that. In addition, should you need any research sent directly to you, I will also try to get that done beginning from this year. 

Anyway, I will try to outperform the last year with more posts in 2016.

Thank you again.