“Dear David, thank you for you continuous guidance and I have to admit that the markets were generous to us year to date with a respectable contribution from your service. As we are managing emerging/frontiers markets fund I would be keen to hear your opinion on Sri Lanka equity market. CSEALL Index has been the strongest contributor to the performance of the fund and I am wondering whether the consistency on the charts is still there? And do you also see some commonality between SENSEX and CSEALL. Yes the countries are neighbours but .... Kind regards,”

David Fuller's view

Thank you for your kind words and congratulations on the performance of your fund.

I am sure you know more about Sri Lanka than I do, so I will largely confine my comments to the technical action.  The CSEALL Index (weekly & daily) obviously had a good run, commencing in February, but it became quite overextended relative to its 200-day (40-week) moving average.  It was also testing the early 2011 peak, following a spectacular 2-year run.  Everyone looking at this chart knows what happened thereafter – a significant retracement - so the 7500 region is an obvious psychological resistance level.  Moreover, the Index has clearly lost what was this year’s persistent strength until October. A short-term correction has occurred and this could easily persist for a while longer. 

Nevertheless, CSEALL’s valuation of p/e 13.43 and yield 2.54%, according to Bloomberg, is not expensive.  I assume these valuations are lower than they were in 2011 and underlying support is closer to hand.  The Sri Lankan Rupee (LKR), shown inversely against the USD, will obviously be important and has begun to ease recently.  If LKR weakens beyond the 2012 low near 134, I assume that would result in a somewhat bigger and lengthier stock market correction.   

So there are some short to medium-term uncertainties, but against the background of a bullish global tailwind in terms of liquidity and the performance of many considerably larger stock markets.  Governance will be a key consideration, requiring pro-growth policies and political stability.  Also, keep a close eye on your two largest shares – John Keells Holdings and Ceylon Tobacco Co, as they account for over 15.5% of CSEALL’s weighting.  There has been some commonality between SENSEX and CSEALL, as you have indicated. Neighbouring India could certainly be an influence from time to time, and the fact that you ask, suggests that India’s performance may have been an influence.  It is an interesting question.