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Friday, 6 June 2014 00:42 - - {{hitsCtrl.values.hits}}
I am glad to have a very enjoyable job, not the one described in the bio in front of you, but as a tourist, where I visit countries with frontier and emerging capital markets. Of all the countries that I have visited, and I say this to anyone that asks me, Sri Lanka is my favourite.
It is only in the past 18 months that we have put serious capital to work and that is why I would say now is an excellent time to invest in Sri Lanka. I am very positive about the outlook of the Sri Lankan economy; in my opinion the best economic growth stories are very supply side-led, here Sri Lanka can excel, adding infrastructure where it did not exist before.
Set for an upswing
Sri Lanka is adding port capacity to leverage its position on East-West shipment routes, developing itself into a transhipment hub, and working on more efficient and powerful power capacity – these very simple improvements will have a very large impact on the productive potential of the economy.
When the supply side potential is combined with a favourable economic cycle, it is the best time to invest. After a few years of slow credit growth and lower GDP growth and the necessary depreciation of the rupee, Sri Lanka looks set for an upswing.
Strong corporate culture
However, GDP growth is not the whole story, there are a number of academic studies that show low correlation between GDP growth and market performance, some even show negative correlation. However, to create equity performance what we really need is focus of companies on shareholder returns, and here I am very pleased to say; Sri Lanka scores very well, with a strong corporate culture and a focus on investors.
For instance, the last time I visited Sri Lanka I had 100% fulfilment of my meeting requests, that has never happened to me before. Disclosure is generally strong and corporates take their CSR very seriously; I would not normally call out on a company, but John Keells’ 20 page report in its Annual Report is on environmental impact and business ethics is quite impressive in emerging markets.
Attractive valuations
We find valuations in Sri Lanka quite attractive, for instance banks are a very good prospect. In most other emerging markets you will find that banks have been a good way to get exposure to the economic development of a country over time, so long as they are run prudently.
In Sri Lanka, I think the investment case is even more compelling, penetration of loans stands at just 30% of GDP, which is well below emerging market norms, a typical EM country would have 70 to 100% loans to GDP. Banks in Sri Lanka trade at cheap multiples, as shown earlier. Therefore in our opinion, banks are a cheap way to get exposure to Sri Lanka’s development.
Twin deficits and liquidity issues
However there are some issues, Sri Lanka has some large twin deficits, and it must be careful to avoid the trap that many other emerging markets have fallen into by becoming dependent on foreign savings rather than domestic savings, to grow.
The more pressing issue for us however is liquidity, and despite a plethora of theoretically-interesting investments, the list of companies that offer sufficient ownership is fairly restrictive. Liquidity however will improve over time and anything that can be done in this regard will be very welcome.
Finally, if you just compare Sri Lanka with some of the other frontier markets, it is certainly less liquid, compared to Saudi Arabia, Nigeria, Pakistan and even Vietnam and it is also a little more expensive on earnings multiples, than some of these other markets.
However, I believe that the long-term prospects are among the most attractive in the frontier universe. Therefore we view Sri Lanka as a compelling place to invest on a relative basis but also on an absolute basis and consequently Sri Lanka is a large overweight on our funds.
