The banking and finance sector is hit by a multitude of factors and a sharp deterioration in the credit quality of the existing loan book is the biggest challenge faced by the sector says Guardian Acuity Equity Fund.
The new concessionary working capital loan scheme introduced by the Central Bank, albeit it is necessary to prevent some businesses from going under, is bringing additional risk to the balance sheet. Further, the sector will bear the foregone interest cost of the debt moratorium given to their customers.
A few relief measures given by the central bank, in particular, a refinancing facility, reduction in SRR, and relaxation on capital requirements and NPL classification rules, together with gains from currency depreciation may negate the impact to some extent. Other sectors that involve manufacturing are facing a shortage of labour and raw materials, and nonessentials’ manufacturers are not getting orders from retailers.
Most manufacturers are in a tighter cash situation due to difficulty in recovery of receivables, and fixed overheads. However, these industries and retail traders which expose to the local economy will start to recover as soon as the economy opens up but will take few quarters to reach pre-COVID level.
The local and global economy has been through periods of major disruptions in the past. “But it recovered eventually and the stock market was a precursor for that as investors react to events before they happen. However, we continue to maintain a degree of caution and stick to our investment strategy with a medium term outlook while staying nimble to gain market opportunities.”
The global equity markets reacted fast to the expected impact of the pandemic albeit there wasn’t a proper estimate of the same. The key global equity markets started to fall since the third week of February and reached a bottom in the second half of March (In March: US S&P 500 -12%, UK FTSE ASI -15%, MSCI EM -15%) before bouncing back to the current levels in April (In April: US S&P 500 +13%, UK FTSE ASI +5%, MSCI EM +9%). Against this backdrop, the Colombo bourse followed a similar trend until March 20, recording a drop of 18.3% for the month of March, when the market was closed by authorities due to the curfew situation in the country. Since then, investor sentiment hasn’t been reflected in the CSE as it’s been closed throughout April. Yet, almost all the sectors of the CSE have been affected by shutting down the local and global economies.
Guardian Acuity Equity Fund is a growth fund which invests in a diversified portfolio of listed equity securities with the objective of achieving medium to long term capital appreciation.
(SS)
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