Top equities investor from UK with $ 60 m exposure optimistic of ‘reforming SL’

• Hosking Partners LLP Founder and Portfolio Manager Jeremy Hosking says impressed by Sri Lanka’s turnaround within 18 months post political and economic crisis of 2022
• Stresses need for significant micro and macro-economic reforms to sustain momentum
• Among top 20 shareholders of several blue chips already rates prospects for Hosking Partners increasing exposure to Lankan listed equities are good
• Welcomes legislation to make the Central Bank independent; opines Sri Lanka should consider relaxing foreign exchange controls and the idea of a currency board system
• Says SL must encourage local companies to invest overseas especially with India being the giant neighbouring market
• Stresses Govt. must shed rigid policies and enable Lankan firms to tap vast potential overseas
• Suggests need for consolidation and mergers among conglomerates, banking and telecom sectors
• Says best way to make banks safe is to make them more profitable
• Moots Govt. must adopt a more proactive engagement with long term foreign investors

Hosking Partners LLP Founder and Portfolio Manager Jeremy Hosking – Pic by Ruwan Walpola

By Nisthar Cassim

A top investor in listed equities from the UK last week expressed optimism on better prospects in Sri Lanka provided the country continues on the path of reforms.

On a pleasure cum business visit, Hosking Partners LLP Founder and Portfolio Manager Jeremy Hosking along with CT CLSA Consultant Marianne Page spoke with the Daily FT about the investments made thus far, what sectors hold future promise and what can Sri Lanka do to enhance growth prospects.

Hosking Partners is among the top 20 shareholders in fundamentally sound listed companies such as John Keells Holdings., Aitken Spence, CT Holdings, Richard Pieris, Bukit Darah, Dialog Axiata, Tokyo Cement and Ceylon Guardian Investment Trust. It also has managed accounts under SSBT including several Australian Superannuation accounts.

Hosking Partners began investing in Lankan listed companies about seven years ago and Jeremy stressed that with an existing portfolio worth over $ 60 million Hosking Partners is a long-term investor.

Established in 2013, Hosking Partners is an independent partnership based in London. Its global equity strategy is focused on the capital cycle approach to investment. Jeremy was also ranked number 351 in the UK Sunday Times Rich List 2019, with a net worth of £375 million. He is also a shareholder in Crystal Palace F.C.

Jeremy said he was impressed by Sri Lanka’s turnaround post political and economic crisis of 2022. “We weren’t expecting the catch-up to take place in 18 months. The progress in the last 18 months has been fantastic,” he said. “It’s going to be a long term pull, and it needs, hopefully, to be associated with significant micro and macro-economic reforms in Sri Lanka. We think the Government is oriented in that direction and anything we can do to assist or help, we are very keen to do that,” Jeremy told the Daily FT in an interview in Colombo.

“We see enormous potential long term in Sri Lanka. The investment case for Sri Lanka, is influenced by the huge pent-up demand and potential, resulting from the lost opportunities due to three-decades old war, originally, and subsequent negative developments,” said Jeremy, a regular visitor having first experienced Sri Lanka in the early 1980s. He is also Sri Lanka’s fifth Golden Visa holder.

He welcomed the legislation to make the Central Bank independent and opined that Sri Lanka should consider the idea of a currency board system.

Relaxing forex controls and the importance of relaxing foreign exchange controls was also stressed. “There is no encouragement for money to come in if you know you can’t take it out,” he quipped.

Encourage local companies to invest overseas

“Sri Lanka must encourage local companies to invest overseas, especially, with India being the giant neighbouring market. If companies had more freedom internationally, they could perhaps be less diversified within Sri Lanka,” opined Jeremy. “The market outside Sri Lanka is massive. The Government, with its rigid policies, is stopping Lankan firms from tapping the potential outside. That stance is obviously massively holding back several industries. So the net result is the product that Sri Lanka actually exports to the world is its skilled people. It is better to exchange money than people.”

He was also of the opinion that all the conglomerates tend to replicate what each other is doing. “We think there should be mergers in the national interest. It would be extremely attractive to investors if there was to be some mergers, or activity between the conglomerates or some shuffling of businesses. But the big question is if a conglomerate sells one of their divisions what are they going to do with the money? So that’s why some sort of foreign exchange reform would really help, as well as modernise the corporate sector,” pointed out Jeremy.

“I think there is a philosophical point about the distinction between ownership and management. You don’t need to have a majority control to think like an owner. There is a lot of nuance between them. You can have a very owner-managed company, but without it necessarily having a family holding 51%,” said Jeremy in support of the need for family-owned companies to modernise.

Noting that large shareholders have a long term interest, Jeremy also suggested there is room for improving return on capital and shareholder value.

Consolidation in banking sector

Thus far, Hosking Partners hasn’t invested in the banking sector despite attractive valuations and liquidity but Jeremy explains that as per his assessment, the banking sector requires significant consolidation if it deserves serious attention.

He said along with consolidation which must be a priority, the banking sector would need some adjustments on their capital potential that shareholders and new investors could participate in. “The regulators in Switzerland decided the best way to make banks safe is to make them more profitable. Then they will be safer. Forcing banks to hold more capital didn’t help as in the case of Credit Suisse,” he argued.

Jeremy acknowledged that consolidation within the banking industry has been spoken for a long time though there hadn’t been much success. “Yes, there are issues of culture and shareholder differences but as it is, banks are supposed to be very attractive for any investors because they are below the boom.” He welcomed the domestic debt restructuring that has been favourable to the banks. However, he stressed banks need to make the IT investments so that less affluent people in the villages can have access to the banking system.

He noted that consolidation would also help the telecom sector to remain progressive.

With regard to the Government’s on-going divestiture of select State Owned Enterprises (SOEs), Jeremy noted that the authorities should use public markets for this exercise.

Commenting on sectors that hold good promise for the future, apart from tourism, Jeremy pointed to renewable energy given the advantage Sri Lanka has thanks to its hydroelectric legacy. He also noted that the Colombo Stock Exchange must structure the market to help identify these new opportunities.

Greater engagement with long term foreign investors

Jeremy said the chances of Hosking Partners increasing exposure to Lankan listed equities are quite good as there are signs that the basket of investment opportunities is widening.

“If the Government adopts a more proactive engagement, foreign investors can be really helpful in this process. I am sure progress can be made in Sri Lanka. However, there are no shortcuts and there is no easy way,” he emphasised.

“If the rupee was three to the dollar at the time of Sri Lanka’s independence, it is Rs. 330 today. The rupee, as it has been, is really just a fig leaf that permits lots of manoeuvring and bad behaviour. So on the whole, what we should be doing in partnership is working together to make bad behaviour more difficult and encourage good behaviour. This way you unlock rapid growth ahead and employment growth, rising real wages.”

He distinguished the difference between long term and short-term investors. One of the things that makes our firm different is once we are in, we tend to think that long term patience is an edge, particularly, since our competitors are very short term. Because they are short term, they can only buy big, liquid companies. In a sense they are prioritising turnover. Now, if you are in Sri Lanka, it is better to prioritise the opposite.”

“When you are long term one needs to work to improve outcomes. This is what is so interesting about our investment in Sri Lanka, whereas we are not just taking what is on the menu but also trying to do the best we can to improve things for the future. Yes, Sri Lanka has had periods of great optimism in the past and the key to the present is turning a cyclical crisis into a long -term opportunity. There have been cyclical crises in Sri Lanka many times before but we haven’t put the ship in a different long-term direction. We have seen on-going hard but positive reforms and the resultant improvements. We want to support that and we think we can,” Jeremy added. Acknowledging there is a bit of political instability ahead of elections, Jeremy said “whoever comes into power they can’t change the course.”