• Sun. May 19th, 2024

FCR recommends cutting exposure to equities to 50% amidst expectations on overall Interest rates and tax hikes

First Capital Research (FCR) recommends investors to limit the exposure to equities to 50% or to aggressively shift
portfolio to defensive counters amidst expectations on overall Interest rates rise and a possible tax hike.

On 19th Aug, ASPI was around 8,250- mark when FCR recommended to reduce equity exposure to 65% on expectation of further upside in the market. As of 4th Sep, the market has surged passed 9,300 and continues to be expensive even beyond the upgraded earnings. As the risk rises in the system supported by the increase in rates, FCR now recommends to further reduce the portfolio to 50% or aggressively shift the portfolio to defensive counters.

Overall Interest rates to rise; FD ceiling to spike:

Continuous rise in interest rates is more likely than not considering the major deterioration of the economic indicators.
With the rise more risk-averse investors may shift their investments towards fixed income instruments adversely
impacting the equity market over the next 3-4 months.

FD Ceiling to rise:

Considering the historic trend sharp switch from equity investments to fixed investments could
be seen when FD rates reach the 10.0% mark. By Oct-21, we are likely to witness the FD ceiling for finance companies to be
raised to 8.0%-9.0%.

Possible tax hike:

: As Sri Lanka is in the 2nd year of a 10%+ budget deficit, potentially with an IMF program coming in
there is a significant possibility for tax rates to be revised upwards. Historically hike in tax rates have shown to be
negatively correlated with positive market returns. As a result, if implemented it’s a big negative for the market.

“Banking, selected dollar income companies, dividend-yielding counters and Life Insurance companies
are the preferred defensive counters,” it said.

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