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ASPI projected to hover around 7,500-8,000

09 Jun 2021

  • First Capital projects Index to reach 7,500-8,250 in 2022

  • Rising interest rates risk for equity market

  • Govt. to reach double-digit deficit this year

  Led by the higher liquidity in the system and cheaper valuations due to healthy earnings, First Capital has upgraded the All Share Price Index (ASPI) fair value for 2021E to a range of 7,500-8,000 from their previous range of 7,000-7,500. In its Equity Strategy Report for the month of June, the firm stated that this amounts to a market return of +18% for 2021E, despite valuations being downgraded to a PER of 12.0x-12.5x (previous 14.0x-14.5x) considering the risks to the economy. However, considering the fact that market has already reached the 7,500 range, First Capital recommended to hold on to the equity allocation and begin exiting beyond 8,000. Considering increasing economic uncertainty and potential shocks, the firm is maintaining an expanded range for 2022E of 7,500-8,250 with a note of caution. According to the report, rising interest rates could be considered as a significant risk for the equity market. However, though First Capital has already witnessed an uptrend in yields, the uptrend has been slow, due to the continuous maintenance of the liquidity position in the money market fueled by the rise in CBSL Holdings. “This trend is likely to continue as the Government continuously falls short of the revenue targets leading to money printing measures. The Government further revised its already high budget deficit upwards to 9.5% of GDP but is most likely to reach a double-digit deficit similar to 2020 amidst the continued infrastructure spending and additional unplanned spending required due to the third Covid wave. Therefore, due to the risk in the system, the rise in interest rates is likely to continue but at a much slower pace, which is unlikely to impact the equity market. However, investors should be mindful of the economic uncertainty and high foreign debt repayment which could lead to a sudden shock/black swan event in the medium term,” First Capital highlighted. First Capital expects export companies to continue their healthy earnings growth with further support via a weaker currency. Taking into account the elevated earnings potential, First Capital Research has upgraded its earnings outlook in absolute terms which translates to a growth of +24% for 2021E while a much lower outlook is anticipated for 2022E of +12% considering the risk involved in the system. Margin expansions led by hefty price increases and lower finance costs have been the primary cause for the earnings growth across the board, amidst the lower competition resulting from the import restrictions. “Further, currency depreciation also supported earnings for dollar income companies and companies with foreign assets.During the 1H2021, we have already witnessed a strong rise in private sector credit (January to April +4.5%) and a gradual improvement in consumer demand despite the temporary setback in May 2021 due to travel restrictions, indicating positivity for banking, NBFI, and FB&T sectors while the marginal rise in interest rates is expected to benefit the insurance sector.” The Government’s revenue shortfall and slower economic growth is resulting in further quantitative easing leading to higher CBSL Holdings and further improvement in liquidity levels in the money market, the report added. The third wave of Covid-19 is further supporting the situation with an aggressive lockdown, slowing down the economy yet again. First Capital believes the current pandemic situation may further slowdown the rise in interest rates ensuring the continuity of the low interest rate environment. In addition, the surge in earnings continues to be the major support for equity investments making overall valuations much cheaper.


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