HK-based fund manager triples weight on Lankan equities

• Fund Manager Ruchir Desai says Asia Frontier Capital has increased its weightage on Sri Lanka to 14% from 5% two years ago
• Stresses Sri Lanka remains extremely attractive; cites current PER of 8% vis-à-vis 14% in pre-crisis period
• Strongly believes improving macro-economic fundamentals and political stability are fantastic combination for those looking to further investing in Sri Lanka market
• Lists election of President Anura Kumara Disanayake and National People’s Power was SL’s turning point; opines growth cycle has only begun now in Sri Lanka
• Calls for continuity of reforms and growth momentum; urges Govt. and officials to keep policy making simple

By Nisthar Cassim

Hong Kong-based Asia Frontier Capital (AFC) has almost tripled its weightage within two years on Sri Lanka’s listed equities, a move which it said was encouraged by improving macroeconomic fundamentals, political stability, and a pick-up in corporate earnings.

AFC’s Fund Manager Ruchir Desai who was in Sri Lanka recently told the Daily FT in an exclusive interview that the weightage two years ago was around 5% whereas at present, it has increased to 14% and growing.

“Strong private sector credit appetite, current account and primary account surpluses, low inflation, pick-up in consumer demand, interest rates, stable exchange rate, robust workers' remittances and tourism earnings and positive economic growth during the past successive quarters are all positives,” said Desai, who was in Sri Lanka to meet the management of companies in which AFC has invested as well as Central Bank Governor Dr. Nandalal Weerasinghe, among others.

Desai opined that the election of Anura Kumara Disanayake and National People’s Power (NPP) last year was the turning point for Sri Lanka, along with the continuity of the program with the International Monetary Fund (IMF) and the conclusion of the External Debt Restructuring.

He was of the view that with stable GDP growth envisaged domestically, there aren’t any major concerns in Sri Lanka barring any major external advantages.

“I think prospects are actually very strong. Given the fact that we had five tough years, the growth cycle has only begun now in Sri Lanka. That’s why I am positive, and that’s why I feel the Price Earnings multiples will expand,” said noting that the market PE was around 9% whereas it was 14% during pre-crisis.

“The whole index is still cheaper than before. Fundamentals are back to where they were pre-crisis.”

“The market is confident. When there’s confidence, there is growth. Improving macroeconomic fundamentals and political stability is a fantastic combination for those who are looking at further investing in the Sri Lanka market,” Desai emphasised. 

From the current 14%, he opines that the weightage on Sri Lanka could grow to a maximum of 18 or 20% in tandem with attractiveness and the country’s growth momentum. AFC invests in high-growth Asian frontier economies by managing the AFC Asia Frontier Fund, AFC Iraq Fund, AFC Uzbekistan Fund, and the AFC Vietnam Fund. At present Sri Lanka is second only to Pakistan in terms of AFC’s weightage. Some of the companies in which AFC has invested are JKH, Commercial Bank, HNB, Hemas Holdings, Sunshine Holdings, Dipped Products and Melstacorp.

Desai pointed out that Sri Lanka can now capitalise on the recent gains made by the Government and the policymakers. “The most important thing is not just political stability but the Government is also very focused on stability and sustaining the gains,” he said.

A long-term investor in Sri Lanka, Desai also urged the Government and officials to keep the policymaking simple. He identified the broader tourism and logistics sectors as growth drivers and if Sri Lanka harnesses the giant Indian market opportunity properly, growth prospects could be far better. Continuity of reforms, fiscal consolidation, restructuring of State Owned Enterprises, promoting Public Private Partnerships will help Sri Lanka build necessary buffers on its path to recovery. “Sri Lanka must not lose the policy reforms and growth momentum by getting complacent,” Desai cautioned. 

In terms of the Colombo Stock Exchange, he said that the biggest drawback remains the low liquidity and policy makers and regulators have a golden opportunity to expand the capital market by enhancing listing and the public float.