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Wednesday, 10 September 2014 00:00 - - {{hitsCtrl.values.hits}}
One of the big hazards that we have in this game of investing, and particularly for people like me who believe in travelling to different countries and analysing fundamentals, is that it is very easy to let your heart rule your head. If you go to a country and it looks good and it feels very chic, you feel like you want to like that country, and the opposite if that country feels soulless or dry.
However, if you look at it from an economic perspective, the opposite is true. Some of the East-Asian Tigers like Korea or Taiwan are some of the countries I least like travelling to and yet those have been some of the economic superstars of the last 30 to 40 years. On the other hand there are countries that I really love travelling to and try to attach a weekend to whenever I travel – whether it is South Africa or Turkey. We all know how volatile the returns have been in some of those countries. Therefore one of the major hazards is that the heart sometimes rules the head.
In love with Sri Lanka
I say this in connection to Sri Lanka, because from the very first time that I went to Sri Lanka in 1997, I instantly fell in love with that country; it is a spectacular country which I love to visit, it has so much raw charm. I liked it in from that first visit in 1997, but as we know over the next decade Sri Lanka was not a very good investment destination, giving all that was going on politically.
I returned to Sri Lanka in 2011 and fell in love with it all over again and the difference this time was that from an investment perspective it seemed like a far more attractive opportunity. With experience over the past 20 years of investment, economics and travel we have come up with our own rules with regard to what elements to look for when analysing if a country is on the rise or the decline. Therefore I will share with you some of the results I get when I look at those results and try to match them with Sri Lanka.
Politics and markets
A very big trend is politics; in fact I cannot remember a time when politics played such a big role in driving markets. You have examples of Brazil, India and Indonesia; where just the change of political leadership has been enough to excite investors, even though the reality on the ground has been bad or slow to change. Investors are very keen to get new leadership in different places, because the old model seems tiered. If you look at the historical template, what you tend to see is that markets tend to do very well in the first term of a new leader and you tend to get diminishing returns to par, as leaders stay in office.
In Sri Lanka’s case, we know that the political leadership has done a very solid job of turning the economy around, of making it such an attractive investment destination. But I have to caution about one thing, typically when a leader stays in office for more than a couple of terms, you tend to get diminishing returns from par; it is not always true but it does end up being the case.
Investment and inflation
Another criterion we look at, on which Sri Lanka is doing very well, is investment on the scale of GDP; Sri Lanka is there on the above 30% zone. If you look at all the economic miracles that have taken place in the world, they have taken place on the back of rising economic investment and Sri Lanka’s investment to GDP ratio is very healthy today.
Then comes the issue of inflation and this is really one war that has been won by countries across the world. In this regard Sri Lanka has made incredible progress. If you look at Sri Lanka’s banking system, it is in pretty good shape; the loan to deposit ratios are fairly healthy and deposit growth is fine.
The good thing about Sri Lanka is that despite high economic growth, if you look at the private sector debt to GDP ratio and the increase in those, those have been fairly healthy, as far as Sri Lanka is concerned.
Geographical sweet spot
Another thing I find positive about Sri Lanka is that it is in the geographical sweet spot and this way I think Sri Lanka has done a great job of playing China and India.
I remember meeting the President in Sri Lanka and I really liked the candour with which he said: “I’ve got China; China is like my friend and India is my relative”; that was the way he addressed the issue of a lack of finance, which is being faced globally.
I think the fact that Sri Lanka is signing many Free Trade Agreements in the region and its attempt to remain neutral is keeping Sri Lanka in a geographical sweet spot.
