Potential Value of the MarketPresented By

Hasitha PremaratneMBA, BSc, FCCA, FCMA(UK), FCMA(SL), CGMA

Last 12 months

Last 36 months

Markets correct itself

You get recessions, you have stock market declines. If you don't understand that's

going to happen, then you're not ready, you won't do well in the markets.

- Peter Lynch

Peter Lynch (born January 19, 1944) is a Wall Street stock investor/Author. He is currently a research

consultant at Fidelity Investments

External Factors vs CSE – The link

Political Stability

Global Developments

Post WarDevelopment

Economy

Company Results

A Look Back

Resilience in a War Torn Market

Since Inception

1 2 3

What War Did to the Market?

• Pressure on government budget – more defense spending.

• Limit economic growth - Lower foreign and local investments.

• Pressure on the currency – low foreign investments means less dollars.

• Rise in inflation – cost of imported goods will rise, supply constraints.

• Interest rates go up – again limit investments. • All these will lead to a drop in corporate profits!!

During 1993 – 2001Date Attack ASPI Points % fall1/5/1993 Suicide attack killing President R. Premadasa -6.1 -1.123/10/1994 Gamini Dissanayake - Presidential Candidate, -31.7 -2.931/1/1996 LTTE exploded Central Bank at Colombo Fort -0.7 -0.124/7/1996 Two bombs ripped in Dehiwala Railway Station -0.3 -0.111/11/1996 Two bombs at Slave Island and Killed 19 Civilia 2.1 0.315/10/1997 Galadari and WTC -14.8 -1.925/1/1998 A Bomb at Sri Dalanda Maligawa -6.6 -1.018/12/1999 Botched attempt to kill President Kumaratunge -5.4 -0.910/3/2000 38 dead and 50 injured, attack at Rajagiriya -6.4 -1.27/6/2000 Minister C V Gooneratne killed -1.4 -0.324/7/2001 Attack on the Katunayake Airport -3.9 -0.9

Worst Times are Behind Us

• Market has survived 24 years of war!

• Still offered strong returns

Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.

- Warren Buffett

Since Inception

Then …….

Why Are We in a Bearish Market?

Overvalued??

Poor Investor Confidence

• Lot of investors burnt their fingers!

• Regulator’s role

• Penny stocks - GREG, TWOD!!

Excessive Credit

• In 2011 market was excessively exposed to credit

• Credit bubbles burst!

• Still the problem is not totally resolved

A Widening Budget Deficit

• Economic Growth – 6.8%• Inflation – 6.3% • Interest rates – 8.6% - 10.6% • Exchange rate - 131.5 (less than 5% dep)

• Budget deficit – a huge challenge

A Widening Budget Deficit

• If Budget deficit is out of control?• Government spending can slowdown• Growth can slowdown • Interest rates can go up

• Eventually will hurt corporate earnings

Way forward

External Factors vs CSE – The link

Political Stability

Global Developments

Post WarDevelopment

Economy

Company Results

Post War Development

• LTTE has been militarily defeated• After 3 rounds of peace talks • Hostilities over 28 years

• A permanent end to war • The most disturbing factor to economic growth

Presented By Hasitha Premaratne 20

Post War Development

• Opens up 2/3rd of coastal belt • Over 27% of the land area • Over 14% of the population – on the increase

• Contribution to GDP• North 2.9%• Eastern 4.7% • Potential to improve and boost overall

economic growth Presented By Hasitha Premaratne 21

Post War Development • Cessation of hostilities:

• Makes SL a safer place to do business• Reduce war related government expenses• A Clear boost to the Corporates listed in the

stock market • Northern Election – a big positive • Post war development framework

Presented By Hasitha Premaratne 22

Political Stability

• A strong government – can implement whatever they want

• Never before in the last 35 years

• Too much control is also a problem

Global Developments• USA is slowly coming out of recession

• EU is slower but we are seeing 1st signs

• US tapering of QE is a big thing for emerging markets – but not so much for us

• Syria – ME tensions impact oil prices

Macro Developments - Summary

• War days are behind us!

• Political situation is stable than ever before

• Global recession – worst seems to be over

• Better than ever before!!

Tackling the Bulls & Bears

Look Out of Horizon

• Equities are not the only Investment opportunity.

• Look for fixed income returns –listed corporate debt, Bills, Bonds etc

• Be aware of the Macro Developments • Shift the portfolio frequently

Average Market Conditions

45%

35%

20%

Fixed Income & other Long term Equity Trading - equity

Bearish Market Vs Bullish Market

60%25%

15%

Fixed Income & other Long term Equity Trading - equity

30%

40%

30%

Fixed Income & other Long term Equity Trading - equity

Corporate Fund Raising

Corporate Fund Raising

Managing the portfolio• In a Bullish market other stocks may better

perform but• In a Bearish market they fall at a faster rate.• Then…..• When macro environment signals changes

in direction, shift your portfolio • Get rid of the smaller caps and stick to less

risky stocks.

Wall Street people learn nothing and forget everything.Benjamin Graham

Exit at the Right Time

• Losing Money is the best way to learn the need to exit.

• Never hesitate to sell if you’ve got your target price.

I've lost tremendous amounts of money in various markets and I think that that's something that makes you

better at my job, not worse. Jim Cramer

Lessons from Foreigners

Net Purchases/(Sales) (Rs. Mn)

2008 2009 2010 2011 20122013 (Jan‐

Jul)

Foreign Companies 16,244  2,246  (16,649) (15,227) 38,425  15,514 

Foreign Individuals (2,294) (3,035) (9,686) (3,812) 236  657 

Local Companies (10,994) (1,363) 29,902  32,438  (20,385) (6,827)

Local Individuals (2,957) 2,152  (3,567) (13,399) (18,276) (9,344)

Diversify the portfolio

• Don’t limit your exposure to one stock or one sector.

• Look for a mix of growth stocks and Defensive stocks

• Look for sectors that offer Growth and Stability

Wide diversification is only required when investors do not understand what they are doing.

- Warren Buffett

Educate the Investors

• Market in not a casino

• Accept reasonable returns

• Have patience

• Get expert help – Unit Trusts

Summary • Macro Developments are better than ever before• We have created the problems ourselves • Bulls & Bears both are bad• Educate the investors • A smart investor will profit even under difficult

times!!!

Thank You