CSE records strongest ever start to a year in terms of foreign investment

Record breaking foreign investment in the Sri Lankan stock market has continued into 2018, with Rs. 4 billion in net foreign purchases during the month of January – a new record for the first month of any given year. The month recorded Rs. 10.7 billion in foreign purchases in the market, while foreign investors made sales worth Rs. 6.7 billion, which has established a record breaking start to the year in terms of net foreign purchases. In this interview, CSE Head of Market Development Niroshan Wijesundere discusses foreign investor participation in the market at present and the investment climate. Following are excerpts:

Q: There are signs of the foreign investor interest in the market continuing in 2018. Can you comment on this?

A: Foreign investors indicated a renewed interest in Sri Lankan stocks in 2017 with record breaking purchases worth Rs. 112 billion, and we have seen that momentum continue into 2018 as well. The level of interest we have seen within the very first month of the year is quite encouraging and indicates that Sri Lankan stocks remain attractive to foreign portfolio investors, especially those with investment interests in frontier markets. What is particularly encouraging is that the level of foreign buying we have seen in 2017 and in the early parts of this year mark a sharp reversal from 2015/16, during which we saw significant fund outflows.

Q: Present developments give us a reason to believe that Sri Lanka at the moment is viewed as a market with considerable growth potential, which is vindicated by the substantial level of foreign investor interest we have experienced in recent times.

What have been the driving forces behind this interest?

A: Attractive valuations with the market Price Earnings Ratio at 10.69 even at present – one of the lowest in the region, encouraging performance among listed companies, an improving macroeconomic outlook and a strong value-driven investment case have contributed to foreign investors placing their confidence in Sri Lankan Stocks. We were most recently mentioned on the Wall Street Journal as the most attractive frontier market in comparison with 11 other countries, according to a model presented by the Citi Bank. The model looked at six key metrics such as earnings momentum, price momentum, valuation, macro growth and imbalances and monetary policy – the fact the Sri Lanka topped this list gives some great perspective into the value proposition the market offers at present. Vietnam and Bangladesh, who you could say are our direct competitors being other Asian frontier markets were covered on the model as well along with countries such as Argentina, Egypt, Nigeria, Romania and others.

Positive developments such as noticeable improvements in the gross official reserves, flexible exchange rate management, a recovering Balance of Payments position, strong FDI numbers and fiscal consolidation have contributed to an improvement in the macro-economic outlook, which is certainly important when attempting to attract foreign investment to the market.

There have also been the odd one-off factors such as Pakistan achieving emerging market status mid last year and more funds moving into Sri Lanka as a result of portfolio rebalancing. On the other hand, while positive local developments have definitely served us well, a supportive global backdrop for Asian stocks and frontier markets in 2017 where we have seen an influx of funds to Asia has helped channel foreign investment to the CSE.

Q: How responsive are Sri Lankan stocks to developments in more matured global markets?

A: The Sri Lankan stock market has over the years been quite unique, in the sense that it has had a low correlation with developed and emerging markets and their trends. This has been something that many analysts have noted in the past, and certainly gives us an interesting selling point considering that funds that generally look at frontier markets look for diversification opportunities. The fact that we are very much local in character has worked towards our advantage.

As we speak global markets are facing a sell-off, with even most regional indices in Hong Kong, Vietnam, Korea, India and Malaysia sharply declining within the past few days. The impact that this sell-off has had on Sri Lanka, at this point, has been minimal, where we are still in a positive returns position in terms of both the Indices when compared to how we started 2018. There is a strong reason to believe that the Sri Lankan stock market is based on local driving forces and the performance of our listed entities, rather than global market related developments. This has in the past resulted in foreign investors buying into Sri Lankan stocks at a time when on a global scale, the trend points to investors moving out of equities and focusing more on fixed income.

Q: What impression do these foreign inflows make on a more macro scale?

A: Foreign inflows certainly do have a positive impact on the Balance of Payments as witnessed in 2017, which was also acknowledged by the Central Bank. Increased international interest in the Stock Market would lead to a broader focus on the country as a whole, and would benefit the Sri Lankan economy and listed companies in their bid for growth. A stock market that attracts foreign investors has the potential to be perceived as a sign of strength, and of a market-friendly environment – especially in the context of an emerging country like Sri Lanka. Recent developments in the Sri Lankan stock market in the foreign investment front would therefore be certainly encouraging, even to FDI investors that are considering investing in Sri Lanka.

As I said, macro-economic factors always come under close consideration when foreign investors look at investing in a particular stock market, and the fact that foreign investors are maintaining an interest in Sri Lankan stocks indicates that they remain optimistic on the way forward for the country. Healthy levels of foreign investor interest therefore is somewhat an endorsement of the progress been made in a macro sense and of the socio-economic reforms that are being implemented.

Q: How does the CSE intend to sustain this level of interest?

A: We are constantly engaging the foreign investor community in key markets to create awareness on the buying opportunity in Sri Lankan stocks and the attractive value proposition. The Invest Sri Lanka capital market promotion took place in Australia, New Zealand and the USA in 2017 after a lapse of a year and we did have encouraging results. We will look at engaging some key markets through the Invest Sri Lanka brand this year as well and the Securities and Exchange Commission of SL (SEC) has played an important role in these Forums by co-organising the initiatives.

We also position the stock market at foreign investment focused forums and business conclaves hosted by neutral organisations both in Sri Lanka and around the world. Stock Brokers also do engage foreign investors constantly and conduct their own promotional efforts and play a significant role in securing foreign investment into the Sri Lankan market.

What we are also now looking at, is to create awareness on Sri Lankan stocks in non-traditional markets, similar to what we did in Australia in 2017, which I must say, was a considerable success with 2017 recording an all-time record in foreign purchases by Australia in CSE’s history. We will therefore look to make our investment case in new markets and also look to capitalise on unique bilateral developments such as the signing of trade agreements and celebration of diplomatic relations between Sri Lanka and countries with a strong investor presence or potential.

In the long run, an upgrade to the emerging market classification would expand our scope in generating foreign investments into the market as it would open up the market to a wider base of portfolio investors. Substantial developments in terms of market size and liquidity need to be achieved in this regard, supported by macro-economic developments and improvements to market infrastructure. While this is certainly an objective we are working on, factors such as the listing of large state-owned enterprises, a healthy, positive economic outlook and sustained political stability which are largely external factors, need to work in the market’s favour for an emerging market status to be achieved.

Q: Finally, how can this foreign interest be used to encourage local investors?

A: Foreign investors have certainly been quick to move on the buying opportunity Sri Lankan stocks have presented since 2017and this makes a strong case for improved involvement among local institutional and individual investors as well. The opportunity has always been available for both local and foreign investors and is still on the table. The onus is on the local investors to engage in the market and benefit from its value proposition. We as an exchange will work on creating the awareness on these opportunities both among existing and new local investor segments.

The CSE in partnership with the SEC and other stakeholders are working on a concentrated effort to create awareness among both local retail and institutional investors. Approximately 350 awareness and education programs will be conducted through the CSE branch network focused on retail investors this year and we will also continue to collaborate with the SEC for the ‘Kotas Welandapola Nagarayen Nagarayata’ series, with Regional Investor Days in Panadura, Batticaloa, Bandarawela, Kurunegala, Embilipitiya and Anuradhapura. 

The series which was held in five towns around the country in 2017 drew a keen interest among locals, especially new investors who have not been associated with the market before. Likewise, we aim to reach out to non-traditional markets around the country with the objective of expanding our retail base.

As for institutional investors and high-net-worth investors (HNI), we will continue with the research presentation series conducted with the Colombo Stock Brokers Association (CSBA) presenting investment research on companies featured on the S&P SL 20 Index this year as well and we will look to engage the large state institutional funds on an individual basis to present the investment case for stocks. Attractive valuations and the value proposition I mentioned earlier offers us a good opportunity to reactivate the local HNI and Institutional segments of our market through creating awareness.

We therefore look forward to the support of capital market stakeholders including stock brokers and unit trust management companies in this awareness drive, and invite all local investors to consider what is presently a good opportunity to engage and benefit from the stock market.