SL calls for investors to partake in capital market growth story

Friday, 10 October 2014 10:34 - - {{hitsCtrl.values.hits}}

To celebrate the success the capital market has achieved in the last five years, the Securities and Exchange Commission (SEC) together with the Colombo Stock Exchange (CSE) yesterday hosted the Capital Market Conference 2014 in Colombo.

Featuring President Mahinda Rajapaksa as the Chief Guest, the event that was themed ‘Be a Part of the Growth Story’ saw local and foreign investors, policymakers, regulators, market intermediaries and listed companies together on one platform. The event was attended by public and private sector leaders and a large-cross section of local and foreign stakeholders. Visiting foreign delegates were from USA, UK, Germany, Hong Kong, Singapore, Japan, Switzerland, Netherland, Thailand, Malaysia, India, Pakistan, Saudi Arabia, Bahrain and Dubai. Visiting delegates received top briefings about the economy and the capital market from SEC Chairman Dr. Nalaka Godahewa, Treasury Secretary Dr. P.B. Jayasundera, Central Bank Governor Ajith Nivard Cabraal, and CSE Chairman Vajira Kulatilaka, whereas highlighting the investment experience and potential in Sri Lanka were HSBC Global Private Bank Southeast Asia Co-Head Rob Ioannou and Citi Securities Services Managing Director Philippe Dirckx. While the capital market has been as an element that plays a pivotal role in the nation’s economy, the conference provided policymakers and regulators an opportunity to share insights with the investing community and industry participants. Noting that the presence of President Rajapaksa demonstrates the importance the Government is placing on the capital market as a key contributor for the development of the economy, SEC Chairman Dr. Nalaka Godahewa said the space has been a great beneficiary of the post-war development. Emphasising on the significance of the event, Dr. Godahewa expressed that the conference is quite timely coinciding with a bullish market reflecting overall high confidence and positive sentiments amongst investors. With stock markets considered as the barometers of economic development, Dr. Godahewa said: “There is exceptional performance in the stock market which is symbolic for the post conflict economic progress of Sri Lanka.”

Snapshot of post war capital market progress

Since 2009 the All Share Price Index (ASPI) of the CSE has growth by 300% from 1,800 to 7,400 levels. Market capitalisation has appreciated by over 350% over this period. The daily turnover of CSE which was Rs. 464 million in 2009 has increased to Rs. 1.2 billion by 2014. The net asset value of unit trust has increased from Rs 6.7 Billion to Rs. 75.7 billion. The market capitalisation to GDP ratio has reached 35%. Having presenting the capital market progress, the SEC Chief pointing out that during the last few years a number of strategic initiatives have been taken to develop the capital market in line with the Government’s vision in making Sri Lanka the commercial hub of the region. “We have already completed most of the tasks for economic development and the results you see today are reflective of the success. Naturally our goals are long term and the journey will continue,” he expressed confidently.

Transformation of SL economic landscape

Noting that the topic ‘Asset Markets’ has attracted global attention in recent times with assets bubbles in well-established markets, Dr. Jayasundera opined that it has compelled the majority to take note of underlying risk management challenges. “Understanding this is difficult when the going is good since the tendency is to forget everything and feel good, but when the going is bad, everything becomes amazingly hard. We must not permit good times of today to be the sad thoughts of tomorrow,” he said. Highlighting the improvements of certain macroeconomic indicators, he stressed such would not only help to place the country to achieve ‘Investment Grade’ status for global capital market transactions but would also help to shift from “crowding-out” policy regimes that prevailed in this country to a “crowding-in” policy regime, under the policy strategy of this Government. While pointing out that the capital market development in the emerging economic scenario of Sri Lanka fits well into the nation’s success story, he highlighted fiscal incentives that have been provided for unit trusts, stock brokers, listing of debt and equities and even market participants. “The regulatory framework is sound and independent. Nevertheless, the regulatory task is complex and greater coordination between regulatory arrangements is a must. It equally requires competencies and best practices. After all, the regulatory autonomy lies in the personalities responsible in the different agencies,” emphasised Jayasundera. He elaborated that regulatory autonomy was not going against public policy but instead working in the best interest of public policy, adopting best ethical practices in the public interest. “Economic development cannot be confined to only per capita income growth or a capital market boom. It is a mechanism in which all stakeholders benefit. In my view, a good capital market must be broad based, in which shareholders of companies have confidence,” he said. As investments carry a certain amount of risks, and with such risk can come some pain or some gain, he stated it was up to investors to weigh the potential reward against the risk of an investment and decide if the pain was worth the potential gain. Hence a stock market should not facilitate speculative transactions, manipulations or frauds but instead promote development through investor confidence. “I strongly feel that this viewpoint is relevant for all our businesses and in particular to public companies listed in the stock market. What some countries get from volume-based activities in capital market transactions should be realised in this country from high-quality products and risk-diversified businesses complying with best labour and commercial practices, tax and statutory compliance, dividend distribution and timely disclosure of business data, that will attract recognition of serious investors and retail level participants, both local and foreign.” He reiterated that the best strength of a capital market lies in the public confidence it commands. “One must not forget that the market is driven also by pension funds, long-term savings, shareholder interests and retail level participation, in addition to big players. The choice for us therefore, is quality and best ethical business practices and not quantity and compromised standards and economic fundamentals,” he said. While theoretically, sound optimum solutions and market analysis only can guide markets with discipline, it is imperative to work with practically-sound solutions in public policy and business development. Pointing out that capital market players all over the world know that the presence of insider trading, market manipulations, undisclosed conflict of interests, noncompliance with regulatory requirements, etc. mean trouble ahead, he asserted regulatory interventions were a must in the public interest. “Our work not only involves professional competencies but also ethically sound best practices. I am optimistic that Sri Lanka’s business community, market players and regulators are capable of living up to country aspirations, facilitating the takeoff towards an advance economy,” expressed Jayasundera.

Why come to SL?

In a bid to convince foreign investors of the attractiveness of local capital markets, the Central Bank noted that the macroeconomic indicators have shown remarkable progress and emphasised that Sri Lanka has raised its own standards and its comfort zones have been shaken and is currently in a position where it is looking at reaching the numbers it has aspired to reach for eight years ago. The macroeconomic indicators have shown remarkable progress. “An extraordinary transformation has taken place and we are mentioning this because we want people to understand that this is the platform in which we are in now. When we talk about the new targets, it will give you a confidence that it is this target that this administration would give and want to deliver in the next few years,” he highlighted. Cabraal elaborated that it is in the last few years that there has been high growth and low inflation years in our country since the liberalisation of the economy. “This year we will have inflation as well as growth under control. Organisations such as the IMF have been able to absorb what Sri Lanka is about and have made positive comments as well,” he added. Recalling the status of the economy during the 30-year war, he pointed out that the nation has moved from a vicious cycle to a virtuous cycle. The transition is an important element for micromanagement since the tendency for the stakeholders in the economy is to preserve the cycle. “It was a tough call to move away from that cycle. I want to stress that today we have a great need and a commitment to maintain the new virtuous cycle and that is a key platform which the future will be built on,” he said. Sharing where the nation aspires to be by 2020, the Governor noted Sri Lanka hoped to reach a GDP of $ 150 billion, which means a per capita of about $ 7,500. Economic growth would average to 8% with the Government expecting it to be at 7.5%. He stressed the pace of achievement would not be pushed too hard since it would be too risky for the economy. While inflation is to be maintained at current levels of 3.50%, unemployment is to be limited to standard levels and is an area the Government would like to see a shift in the human resources moving into high potential sectors. “We need to have a debt to GDP level of around 50% and should get used to a rupee appreciation. It is another mindset change that would be required. It is an important one but not easy to achieve. The change would have to be managed properly so we prepare ourselves to reach the target we have set for the real economy,” noted Cabraal. Acknowledging that the enabling environment will need to be further improved, he assured work in that regard had been taken care of. Productivity levels also need to be improved, for which Sri Lanka can learn from the success story of Malaysia. “We are setting several national mileposts because political stability is also important if economic stability is maintained as it is imperative for development. We are delivering what many other countries in our region have not been able to provide so far and we are proud that those aspects have also been nurtured and provided whilst the environment for capital development and big businesses have taken shape in our country. “We will see that by 2020 Sri Lanka’s economy would have greater services as well, and sectors such as tourism and IT/BPO will be great drivers of the economy help us reach our targets in a seamless manner,” he said confidently.

Opportunities in capital market

Pointing out that the country is enjoying economic, political and social stability, CSE Chairman Kulatilaka opined Sri Lanka had the necessary ingredients in the right amount for investments to be brought in. On the equity side, the market capitalisation is at $ 24.1 billion and growing and has 293 companies from 20 sectors. Noting that an important aspect for a portfolio manager is the correlation, he shared that currently the indicators for that are very low and is an ideal situation for diversification. “There is immense potential for markets to grow and for new stocks to be listed in the countries. So there are lot of opportunities hidden in this space. Key valuations are quite attractive when looking at the regional PE. Sector PEs is quite low and growing sectors are attractively priced as well,” Kulatilaka told investors. Other sectors that will have a growth is the real estate space since it having gone through a high interest rate scenario, it is now reducing and the area is expected to boom. “Overall there are lot of growth sectors and lot of companies can come to the market for listing purposes so the overall capital market on the equity side has a very good outlook,” he said. On the debt market side, the Eurodollar bond is one of the aspects that are available for investors. Alongside that also available are Sri Lanka development bonds, sovereign bonds and corporate bonds. Having listed the available investment instruments, Kulatilaka pointed out all have given attractive returns. He noted that a strategy that can be followed is to have a five-year investment horizon when investing in fixed income. He shared that the Government has given concessions for all debentures issued for two years are tax free, that is there will be no withholding tax and all returns are tax free. Promoting Government bonds, he highlighted that it is a “very big liquid market” and is five times the size of the equity market of the country. Kulatilaka stressed a big change is due to take place in the capital market where the CB and the CSE is working together to bring a common trading system to all the instruments. “The expectation is to have more transparency in trading activities. The Government also made corporate bond investment very simple by having only one account, the Securities and Investment account, and through that there are no impediments to take the money back,” he shared. Pix by Upul Abayasekara and Lasantha Kumara