Q&A WITH Hasitha Premaratne

Compiled by Nicola Jayasundera

Q: Foreign investors have been net sellers in the last few months. Could you outline the reasons for this?
A: For most of last year, foreigners were net sellers to the tune of almost Rs. 10.9 billion by the end of November. But overall, they were quite active throughout the year with purchases standing at 54.6 billion rupees and sales amounting to Rs. 65.5 billion.

In the lead up to the presidential election, there was more aggressive foreign selling in the market. Foreigners were buyers to the tune of three billion rupees while selling to the value of Rs. 9.5 billion. The market’s price-earnings (PE) ratio rose to 11 times compared to a low of 8.4 in the middle of the year.

Foreign investors aren’t yet confident about the new government’s policy frame-work and the benefits they will receive from their investments – especially in some counters, which have increased substantially in the short run – so they may consider them to be overvalued.

It will be interesting to see how foreigners react to the policy framework in the coming months.

Q: With the conclusion of the presidential election and appointment of a caretaker government, will investors have the confidence to invest aggressively?
A: With the conclusion of the presidential election, activity picked up, and retail investors returned to the market with more optimism and aggression. Meanwhile, foreign investors have been less optimistic and will be more focussed on selling.

From an investor perspective, the president’s party will have a clear majority in parliament. This means that both the executive and legislature will be from the same party, and work together to drive policy framework.

Therefore, better execution can be expected across both but the concern would be whether parliament supports longer-term growth and sustainable development – especially given the large debt repayments due in the next few years.

And given the recent tax cuts, chances of the budget deficit widening further are much stronger.

On the one hand, positive momentum is expected on the back of stronger and speedier policy execution from the new administration. And on the other, there is concern about whether the policies adopted will support sustainable development and the nation’s macroeconomic fundamentals.

Therefore, investors may adopt a ‘wait and see’ approach, while the fundamentals will be questioned in the upcoming months given the lead up to the general election.

Q: What do you expect in regard to market behaviour in the near term?
A: The market will remain positive in the next few weeks with retail activity and local institutions entering the fray, backed by government decisions and driving a positive note.

Foreigners may continue to wait and see, and some larger investors could still be on the lookout for the implications of policies and populist decisions that will be taken leading up to the general election.

A major aspect that will unravel shortly is the macroeconomic direction adopted by the new government in terms of the exchange rate and interest rates, as well as the management of foreign currency reserves given the large debt repayment due this year.

As positive momentum is expected, pockets of profit taking will arise with these changes.

The important consideration is whether fundamentals can strengthen for corporates with the increase in consumption that one expects as a result of populist decisions that will be taken ahead of the next election.