Investors positive on profitability recovery by 2021 | Daily News


Investors positive on profitability recovery by 2021

2020 earnings are expected to improve with a major adjustment to Q2
2020 earnings are expected to improve with a major adjustment to Q2

With business activity expected to gradually pick and accelerate towards next year, investors are likely to be positive on the recovery of profitability towards 2021 end the Mid-Year Outlook 2020 of First Capital Research said.

“We believe that the bulk of the earnings dip is already factored into the market and thereby assessing the earnings recovery for 2021E and evaluating businesses on forward earnings makes more sense as an investor. In line with the thinking, we expect stronger market returns during 2020, maintaining our upgraded market fair value range at 5,200-5,600.”

“First Capital does not rule out the possibility of a further policy rate cut, which may bring down bond yields further below the bottom of our bond yield bands (1year-5.0%, 5 year-6.5%, 10 year-7.0%) for a short period considering the sizable liquidity in the system.”

“With the rise in Government borrowing requirement, we expect a gradual increase in pressure on bond yields towards the end of 4Q-2020 and early 1Q-2021, while also supported by the rising consumer demand and private credit. We expect yields to be on a rising trend and enter the bands during 1Q-2021 and afterwards gradually move up further during 2Q-2021.

Banking Rates (AWPR) to remain low below 7% in 3Q and range from 7 %-8 % over next 12 months.

In line with the 5 year bond, we expect the AWPR to have bottomed out around 6.5%-7.0% and remain below 7 % during 3Q-2020. During 4Q-2020 and 1H-2021 we expect a slight increase in AWPR but is likely to remain within the band of 7.0% - 8.0%.

“With the potentially stable external environment, we expect the USD/LKR rate to stay stable in the 2H2020 with a marginal depreciation as the Government gradually relaxes import restrictions. We believe restrictions are likely to be lifted in 1H-2021 which may lead to a steep depreciation.”

ASPI expected fair value maintained (as per Jul’20 update) to a range of 5,200-5,600 for 2020 and 5,800-6,200 for 2021. Amidst the lack of demand for credit, import restrictions and the slowness in recovery in consumer demand may result in GDP growth turning positive only by 4Q-2020 while the unexpected contraction in 1Q-2020 further hampered prospects of a lower contraction in GDP.

Considering the heavy CBSL Holding volume and inevitable relaxation of import restrictions, the economy may showcase a currency spike followed by an interest rate spike resulting in another shock to the economy which may prevent a V shaped recovery while inducing a W-shape for the recovery process.

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