Sri Lanka: Markets rebound

The Post war market

The BIG Issue met with Angelo Ranasinghe, Director, Bartleet Mallory Stockbrokers, in order to gain an insight into the dynamics behind the resurgent Colombo Stock Exchange in 2009.

Causal factors

In the post war scenario that we find our selves in, the market has been most dynamic in every aspect with both the indices moving up by over 60 per cent in 2009. We have witnessed values, volumes and local participation all increase in May and June in response to a new sense of expectation that the island economy can at last full fill its true potential. Whilst foreign participation was mixed, with investors appearing as both sellers and buyers, the long term expectation is of improved foreign participation as market fundamentals improve. What is mot interesting to note is that all those investors who remained on the sidelines during the past year or two have now re-entered the market and made an impact.

Two important factors can be considered in analyzing the positive sentiments at the Colombo Stock Exchange (CSE). First and most importantly, the long drawn out war is finally over. The implications of this are far reaching not least with regard to the impact on the risk factors that have shifted in favor of more investment. Add improved political stability, policy continuity and expat financial support and we have the main ingredients for an improved country rating which can finally table Sri Lanka as a favored emerging economy.

The other important factor influencing investor sentiments is the anticipated fall in interest rates following a long period of prohibitively high levels. This factor should not be underscored due to its impact on investor behavior and the savings habit of the local population.

Short and long

In the short run, a continuation of the positive sentiments is likely. During the month of May the market gained by a whopping 21 per cent while June witnessed further gains of around ten percent.

A technical correction is expected in the medium term as the market re-adjusts to the February 2007 levels when the trend was positive and the CSE was one of the leading bourses in the Asia region. Since then the market has been stifled when armed conflict remerged and later the onset of the global recession. Now that the first issue has been resolved the CSE will have to wait a while longer for the second boost from the global recovery. Some signs are emerging that this recovery is also in the pipeline and this will have a direct bearing on the fundamentals of local companies, many of whom rely on export markets for their revenue.

Whilst a few have been resilient throughout, many sectors are hoping that the new local economic climate along with a improving international environment will breath new life into their dwindling industry.

Tourism is a good case in point. During the month of June the sector shot up by some 20 percent at the CSE and the long term prospects in the industry have now taken a u-turn. The government is also planning on further developing the hotel sector with his Excellency, The President, aiming at 2.5 million tourists by 2015. Consequently, a number of new awareness programs are currently getting into gear and there are signs that foreign investors are looking at moving into the local tourism industry given the long term prospects.

As the north and east regions start to recover from years of conflict, we can expect to witness social development where the human factor takes on economic significance. In addition, the long term infrastructure pipelined for the island will generate employment and economic opportunities both directly and indirectly which will have a multiplier impact on the wider economy which will keep the CSE on a positive incline.

Furthermore, the overall economic impact of having the north and east fully integrated into the island economy where agricultural output and fishing for example contributes to growth, will serve to boost the islands GDP.

With support from overseas in the areas of power generation and infrastructure development, a strong rural economy is also likely to be a long term feature of the post war scenario. Consequently, there will be more money floating around in rural areas, both in the south and in the north.

In this regard, there will be opportunities for the CSE to increase its current participation rates. Less than 0.1 per cent of the population currently partake in the CSE and the potential for wider participation is in the offing. The CSE is currently in the process of sending out a team to Jaffna in order to look at setting-up a branch office.


Threats?

The delay in processing the IMF loan is perhaps of most concern at the national economy level in the short term. However, there is a feeling that even if the loan is finally declined, the government will be able to rely on alternative sources of finance, given that it has strong links with China, the Middle East and East Asia.

Moreover, additional flows of FDI will also serve to increase foreign exchange reserves and reduce the exchange burden on the Central Bank. We can note that already, a Singapore based venture is looking at the possibility of setting up a Private Equity Fund specifically for Sri Lanka.

Consequently, given a scenario of global economic recovery, especially in the islands key export markets, the CSE is expected to reap the benefits in terms of value appreciation as well as participation and volumes.

Let the good times roll!