As the dust settles on a roller coaster year for listed stocks, most individual investors – who didn’t prune portfolios in 2011 – would be staring at vastly diminished ones by now. Rebuilding these battered portfolios won’t be an easy task and will be particularly complex if emotions are allowed to intervene as is often the case with retail investors.
Echelon brought together two stock analysts, Waruna Singappuli who heads the research unit at NDB Stockbrokers and Purasisi Jinadasa, a senior analyst from Capital Alliance Securities. Also joining the group was Prabodha Samarasekara, Chief Executive of NDB Wealth Management and Nirosh De Silva who heads the private equity firm Horizon Partners.
We asked these analysts and industry professionals to discuss challenges of allocating an investment portfolio with a three year horizon in Sri Lankan assets. Excerpts of the discussion…
Looking at the choices available to an investor it looks like equity is a very attractive one right now versus one year ago?
Waruna: Yes I would say so. Having said that the interest rates are substantially high, around 14% for a fixed deposit in any of the established banks.
Stock prices look reasonably attractive; say maybe market Price to Earnings (PE) ratio is around 10 to 11 times and in the region PE’s are around 10 to 15 times. Also Sri Lanka is talking about high economic growth which will probably reflect in corporate profit growth also. But the issue with equities is although it’s underpriced, it won’t go up tomorrow.
Ten times PE on past earnings, is that a good valuation generally speaking?
Purasisi: I think in general it’s a good valuation if you compare it to the region. But there are a few stocks that you will have to pick out of the box and the stocks that we are currently looking at, are stocks that have products or services that cannot be encroached on by competition and has say a large moat around it. These companies generally have more than 80% market share and a solid service that competitors can’t tap into. But in general when investors look at the Sri Lankan market they should look at it as a five year horizon investment only market.
The stock market is too immature and doesn’t have any depth to be actively traded, there are way too many brokers in the market and that also leads to all sorts of problems. One of the things we should consider doing is hiring portfolio managers as opposed to brokers and look at the long term and have their compensations structure changed so that it’s on the performance of the portfolio as opposed to brokerage. This I think will be a bottom up approach to solving the problem as opposed to top down which we are witnessing now.
The market is coming off a very turbulent period. Do you think things have settled to the degree that should get individual investors allocating greater amounts of their portfolio into stocks?
Nirosh: I have been in equities in Sri Lanka since 1993 and I never had a fixed deposit in my life, I always had money in equities. If my wife goes and buys a piece of jewellery I sell some shares and settle it, and when my credit card bill comes I have to sell some shares and settle it, so that’s the game plan. We have done this during the war years too. For any retail investor or institutional investor there’s one piece of advice I can give, it is that you have to look at what you are buying and be comfortable with holding it for a longer period of time.
Let’s assume that you’re a typical retail investor who isn’t that sophisticated, is the market now safe?
Nirosh: No the market is not safe, and as it goes up it’s going to get more unsafe for the smaller guys, who are not being properly advised. The shake down is going to be worse the next time when a correction comes. Are markets safe for anybody? No. Can fixed income erode your capital? It can. Can equities erode your capital? It can. So there is nothing certain about investing.
If you can afford to take a short term unrealized loss, I strongly believe Sri Lanka is going to have higher growth than most countries in this world. If you have that view then certainly there are many good stocks that you can buy in the market.
Should a retail investor be overweight on equity right now?
Nirosh: I think a Sri Lankan investor who has capital should be overweight on Sri Lankan equities in the next decade.
Prabodha: One and a half years ago, we really started reducing exposure to the equity markets, for two reasons: after the war ended the market went up, 400% and that was a huge increase, so we felt that this adjustment to asset values happened too fast.
We also saw credit growth picking up not only from the private sector but also from the government sector. These growth rates we realized could not be sustained so we reduced our exposure to the share market, and in fact even in fixed income we took a very short term view, which has paid off.
Waruna: The retail mentality is short term. So see 10% price falls and they panic and. If that’s the case they should be in the fixed income, especially with the interest rates touching 15%. But for retailers with holding power, who has that maturity, they should be at least fair-weighted, getting overweight in the next few months because the Central Bank has clearly said interest rates would fall and an overheating economy is also less of a risk, so all those are positive things.
Purasis: Next two or three years, yes for sure, overweight on equities. Again, there is a huge burden of responsibility for us to educate the investing public, and tell them where to allocate their money. There are a few multinational firms paying dividends in excess of 6%. Over the next few years, these are clear buys.