Sri Lanka’s All Share Price Index Hits a New High: A Closer Look at the 2024 Bull Market
This week, the Sri Lanka All Share Price Index (ASPI) reached an all-time high (ATH), surpassing 13,500. While optimism abounds among local and foreign investors about the country’s economic recovery, it’s worth diving deeper to understand the forces driving this uptrend. As Confucius said, “Study the past if you would define the future,” let’s compare two recent bull markets in the Colombo Stock Exchange : the bull market leading to the January 2022 peak and the current bull market leading to December 2024 ATH.
Key Drivers of the Uptrend
2022 bull market:
2024 bull market:
Change of the ASPI Calculation Method
One major factor contributing to the reduced volatility in 2024 is the adjustment in ASPI's calculation methodology.
What changed?
On 24th January 2022, the Colombo Stock Exchange shifted from a full market-cap-weighted basis to a free-float-adjusted market-cap-weighted system, focusing only on tradable shares.
Why the change?
To minimize the impact of illiquid shares, which previously led to artificial volatility.
As a result, the 2024 rally reflects more “real” gains than the speculative surges driven by illiquid shares as seen in early 2022.
Earnings and Valuations
Cumulative Earnings
Cumulative earnings 3 years leading to Jan 2022:
It's important to note that until March 2022, the USD/LKR exchange rate was pegged at 200, which inflated the USD earnings figures for 2021. If we adjust the LKR earnings using a more realistic exchange rate of 320, the USD equivalent for 2021 would be approximately 1.48B. This adjustment highlights that artificial factors (such as currency pegging) rather than underlying fundamentals likely influenced the January 2022 market peak.
Cumulative earnings leading to Dec 2024:
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With the LKR now free-floated, we observe significant growth in corporate profits in USD terms, indicating that earnings play a key role in driving the current rally. The 2024 bull market reflects real profitability improvements across multiple sectors.
Valuation Ratios
The valuation ratios indicate that the January 2022 market peak was driven more by hype than by fundamentals, especially when compared to today. It's also worth noting that the delisting of major players like Expolanka Holdings (EXPO) and Nestlé (NEST) significantly reduced market capitalization, despite smaller IPOs being introduced.
Additionally, recent corporate earnings have been impacted by tax reforms, which have increased the burden on companies. However, the 2024 cumulative earnings and valuation metrics already account for this new tax regime. Despite challenges such as higher taxes, increased salaries, utility bills, LKR depreciation (affecting imports), and inflation, listed companies have demonstrated resilience, with cumulative earnings and valuation metrics showing remarkable improvement. This signals a healthier, more robust market foundation.
Macroeconomic Context
2022 bull market:
The January 2022 bull market occurred during a period when international rating agencies were downgrading Sri Lanka's creditworthiness. By mid-2022, the country faced one of the most severe economic crises in its recent history.
2024 bull market:
Fast forward to December 2024, Sri Lanka is steadily recovering from its economic crisis, with key economic indicators showing significant improvement. Despite the 2024 bull market experiencing a net foreign outflow of 10.4B LKR and credit ratings remaining unchanged since 2022 (reflecting default risk), optimism prevails. Rating upgrades are anticipated, supported by the IMF programme, debt restructuring efforts, and ongoing structural reforms.
Inflation has been effectively controlled, with the Consumer Price Index (CCPI) declining for three consecutive months. November 2024 marked the steepest drop (-2.1%), ushering in the first deflationary period since March 1995. The resurgence of the tourism industry, robust worker remittances, and growth in export-oriented activities are strengthening foreign exchange reserves. Additionally, the return of a low-interest-rate regime is providing a boost to market confidence.
GDP has grown consistently over the last four quarters, ranging from 1.6% to 5.3%, following six consecutive quarters of contraction (-0.6% to -12.4%). The current government, backed by a supermajority, offers policy stability, which is expected to drive economic growth and efficiency while reducing dependency and corruption.
Conclusion
The bull market that led to the January 2022 ASPI peak contrasts starkly with the current rally. While the former was characterized by volatility and artificial boosts, the latter appears grounded in stronger fundamentals, making the 2024 gains more sustainable in my opinion.
"In the business world, the rearview mirror is always clearer than the windshield, yet the four most dangerous words in investing remain: 'This time it's different.'" – Warren Buffett & Sir John Templeton
This analysis draws on public data from sources such as Central Bank of Sri Lanka , CEIC Data , Colombo Stock Exchange , TRADING ECONOMICS , X ( Imtiaz Buhardeen ) and reports by Asha Securities Ltd and Almas Equities . While the views and interpretations are my own, I welcome suggestions if I have missed anything significant and alternative perspectives. Let’s continue the conversation, I would love to learn! 😊
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