First Capital Research, recently stated that Sri Lanka’s economic outlook has further weakened due to the seven-week nationwide lockdown which is now being relaxed gradually. Issuing its third revision on Investment Strategy 2020 for May, First Capital Research revised its Bond Yield Outlook for 1Q2020 to 3Q2020 adjusted downwards, one year by 150 bps and 5-year and 10-year bonds by 100 bps. It further added that lacklustre 2Q ,3Q and Central Bank of Sri Lanka intentions may push short term rates down for a limited period. “With the Government’s intention to open up the economy and CBSL’s push to lower interest rates, there are caps being imposed on the recent Bill & Bond auctions which illustrates the intention of the CBSL to maintain lower rates in order boost economic activity and growth.” Considering the risks in the system and the worsening macro indicators First Capital Research prefers to maintain our bond yield bands at the mentioned levels in the previous slide However, with the lacklustre 2Q & 3Q, possible further increase in CBSL Holdings while also considering the intentions and the new rules of the CBSL to push rates lower, First Capital Research highlights that short-mid-term yields may decline by 25-50bps for a very limited period. First Capital’s outlook for Q4 2020 is bearish, maintaining its position that the yield curve may slide upwards by 50-100 bps. With the rise in borrowing pressure, First Capital Research expects a gradual increase in bond yields during 4Q2020. It revised its Banking Rates Outlook saying that the Average Weighted Prime Lending Rate (AWPLR) may fall below 9.0% to c.8.5% amidst the lack of lending and may range between 8.5-9.0% towards 4Q 2020. It has also downgraded its Exchange Rate target but forecasts broadly lesser depreciation up to end 3Q and a stronger dip for 4Q with a year-end target of Rs. 200: 1USD First Capital Research expects the LKR to remain steady with marginal depreciation amidst the import restrictions. However, once the economy opens up with depletion of reserves towards 4Q it expects stronger depreciation of the rupee. Sri Lanka’s Equity market has been closed for over a month providing a new type of risk for foreign investors. In the current situation foreign investors are unable to liquidate their holdings which increases future risk towards Sri Lanka. All frontier markets in the region excluding Bangladesh, continues to remain open despite the current pandemic situation. Thereby, First Capital Research expects heavy foreign selling in the equity market in the short term. Further it expects market earnings of all companies to decline by c.26% compared to the previous expectation of 15-20% dip. Further The All Share Price Index (ASPI) June 2020 target of 5,000 has been withdrawn by First Capital. Stating that the ASPI may dip a further 15-20% to 3,750 on foreign selling and lower earnings. The December 2020 target has been downgraded to 4,750. Year end 2020 ASPI may range 4,600-4,900 with a market training PER of 13.0x – 14.0x it said.
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