Bond, stock managers find opportunities in Sri Lanka

Monday, 3 September 2012 00:07 - - {{hitsCtrl.values.hits}}

By Reshma Kapadia

Emerging Markets Daily: With so much angst over India, some investors are looking for other ways to play the subcontinent and setting their sights on Sri Lanka. The country, a major shipping hub attracting a good deal of investment from China, is rebuilding after a three-decade civil war that left parts of the country with little infrastructure.

All in all, money managers say the economy is growing and not as exposed to the headwinds in the global economy.

On the equity side, some emerging market managers note that the country has a fair share of dividend-payers. As infrastructure is built out in the country, especially in the north which has been neglected for decades, banks may be a good way to play the growth. David Ruff, a manager on the Forward International Dividend (FFINX) and Select Emerging Market Dividend (FSLRX) funds , says the banks have a huge deposit base from the country’s tea farmers. And as hotels and other infrastructure is built, banks are growing. Regulators are limiting loan growth so it doesn’t get out of hand. Much of the earnings growth is being passed on through dividends, with banks like Hatton National Bank paying a 5% dividend yield.

After surging in the first years after the war ended, the MSCI Sri Lanka index is down 9% this year. There is no shortage of risk. For example, earlier this month, Sri Lanka’s market regulator quit–the second in two years–complaining of corruption that made it hard to do his job.

But the opportunity created by the country’s development, especially of its tourism industry, is attractive over the long-term. While much of the developed world is in the midst of a major de-leveraging, Sri Lanka is just beginning a leveraging cycle as it rebuilds. Kristin Ceva, who oversees $5.3 billion in emerging market bond assets for Payden & Rygel including the Emerging Market Bond fund (PYEMX), is one of several bond managers who likes the country’s local bonds, noting that IMF oversight adds comfort over the country’s central bank policies. (The country is seeking another bailout after a 2009 loan from the IMF to help its revival). And the yield on those bonds? 13%.