ECONOMIC PERFORMANCE

		Enlarge Image

		Enlarge Image

Review of the Economy

• The Sri Lankan economy grew by 6.5% during the first three quarters of 2007 and GDP growth for the year 2007 is forecasted to be 6.7%. Quarter to quarter the GDP growth has been Qtr1 – 6.1%, Qtr2 – 6.4% & Qtr3 – 7%.
  
  
• The industry sector has been the main driving force in the economy closely supported by the service sector which on average has grown by 7%. The services sector contributes approximately 63%, industry sector 24% & agriculture sector 13% to the economy.
  
  
• January to November 2007, exports grew by 11% amounting to US$ 6,877 million and imports grew by 8% amounting to US$ 10,142 million. This resulted in a trade deficit. Due to private remittances overall balance of payments remained in surplus.
  

Inflation, interest rates & exchange rates

• Inflation as measured by the point-to-point change in the Colombo Consumers’ Price Index (CCPI) indicated an increase from 19.5% as at end March 2007 to 21.6% in January 2008. However the CCPI annual average change is currently 17.6%.
  
  
• CBSL has maintained its key policy rates at repurchase rate 10.5% & Reverse Repurchase rate at 12%. Inter bank call money rates have been very volatile ranging from a low of 12% and a high of 25%. Further, during this period interest rates too have been increasing. The 3 month T-Bill rate increased 463 basis points to 19.25% while the 12 month T-Bill rate increased by 492 basis points to 19.45% during the period under review. Interest rates are expected to be volatile given major shocks by central bank monetary authorities to curb inflation and lending by commercial banks.
  
  
• The US$ closed at SLRs.107.93 as at end January 2008 (April – SLRs.109.32). The amounts to an appreciation of 1% mainly due to the weakness of the US$ in the world market. Against such currencies as the Euro and the Yen, the rupee has depreciated.
  

		Enlarge Image

• The US$ closed at SLRs.107.93 as at end January 2008 (April – SLRs.109.32). The amounts to an appreciation of 1% mainly due to the weakness of the US$ in the world market. Against such currencies as the Euro and the Yen, the rupee has depreciated.
  

		Enlarge Image

• The ASPI grew marginally by 3.23% for the month; and the MPI by 1.76%.
• Several strategic deals kept the market active with the sale of stake held by NTT in SLT being sold to Global Telecom Holdings of Netherlands (GTH) at Rs.50.50 and sale of majority stake in Hotel Services to a consortium based in Singapore.
• Market interest in the plantation sector continued with rubber and tea prices recording all time highs. Trades in small volumes due to retail investor interest were seen in the sector.
• Heightened activity was evident in SLT, Kelani Tyres, Cargills (Ceylon) Ltd during the period of review.
• Corporate results update
  Dialog which accounts for 21% of the market capitalization halved its profits for the first quarter of 2008 to Rs.1.1 bn from Rs.2.2 bn recorded in 2007. This highlights the effects of stiff competition within the sector. Hayleys group profits declined to Rs.452 mn for Y/E 2007/08 in comparison to Rs. 533mn reported in the last financial year. The banking sector performed well with Commercial Bank (Rs.1.0bn) and NTB (Rs. 144.2mn) recording a growth of 11.5% and 41% in the first quarter

• Future Outlook and Our Strategy
  
  World markets are facing turbulent times given record high crude oil prices touching US$135 and worries of cost push inflation world over. In the local context the country situation and economy remains lackluster due to high interest rates and inflationary pressures with the recent increase in diesel prices. Hence the local equity market is likely to be relatively quiet. Corporate results too will reflect these developments.
  
  The acceptance of the SLT mandatory offer it is likely to inject the market with fresh capital thereby averting a market correction in the short term. However a real threat would be the shift of retail investors to high yielding fixed income investments given the current interest rate trends.
  
  For the long term portfolio, we will use the market opportunities available to accumulate our identified stocks at appropriate prices. The short term portfolios are now equally balanced between fixed income and equities, and the latter consists of some highly selective stocks that are being retained in anticipation of specific event driven price movements. The surplus cash available within the companies have been utilized in two main ways:
  
  
  • Invested in 3 month treasury bills and overnight deposits – depending on cash requirements of each company
  • Partly used to repay ODs in CICL and CGIT (where borrowings were utilized to finance long term acquisitions).