Sri Lanka Exchange Implements New Business Growth Plan!

Sri Lanka’s Colombo Stock Exchange (CSE) has been on a bull run since 2009. Significant post-war growth saw the exchange’s benchmark All Share Index (CSEALL) peak at 7,800 points in February 2011 and although a correction came shortly after, positive market sentiment and a conductive regulatory environment has driven market recovery since mid-2012. Strengthened by an improving economy, the stock exchange appears to be entering a new phase leveraged on strategy, innovation and a redefined business model. Andrew Neil reports.
In 2009 the Sri Lankan government formally declared an end to the 25-year civil war after the army defeated separatist Tamil Tiger rebels. Since then, in the post-conflict economy, Sri Lanka has recorded some useful milestones. Per capita income doubled to over $2,900 in a relatively short period, the economy has grown to a robust $59bn last year, from about $24bn in 2004; inflation has been held at single digits for more than four and a half years; poverty levels are down to around 6% from about 15% and unemployment has been reduced to less than 4%.

Clearly, the list of ‘have dones’ is an impressive one. Similarly, for the country’s capital markets, much has been achieved. As war came to an end, CSE’s market capitalisation was a mere $5.2bn with just 230 companies listed. However, since 2009, the market has grown up by 189% reaching a market capitalisation of $19bn. 59 new companies have been listed with the total number of listings reaching 289. The benchmark CSE All Share Index (CSEALL), on average, has outperformed some of the leading global and regional indices between 2009-2013, ranging between 5300 and 6500 in recent times.

“There is undoubtedly positive momentum in the country and its capital markets,” says CSE’s chief executive officer Rajeeva Bandaranaike. “However CSE’s mission and strategic thrust extends beyond purely market performance. “The exchange’s strategic direction, and its roadmap for transformation, constitute a four-pronged approach for growth. Our strategy encompasses capturing further investment flow, enhancing the CSE’s attractiveness as a fund-raising venue, transforming intermediaries and internal competencies to foster growth and developing into a world class organisation.”

Recent signs suggest that Bandaranaike’s goal of luring foreign money to Sri Lankan shores is well underway. 2012 saw net positive flows of foreign investments totalling LKR39bn (around $300m), signalling confidence in the country’s economic prospects after net outflows in 2010 and 2011. This positive trend continued into 2013 with net foreign inflows reaching LKR23bn.

Data from CSE shows that most of last year’s foreign investment went into banks, finance and insurance. The banking sector’s total loan book has grown at 16% CAGR over 2009-2013 on the back of increased economic activity. In an effort to uphold the growth, the Sri Lankan government has extended several incentives to the financial sector. One proposal allows National Development Bank (NDB) and DFCC Bank to raise up to $250m each for foreign sources over a ten year period with the idea to provide long-term financing to key growth sectors.

Foreign investment into beverage, food and tobacco was also positive, hardly surprising given that tourism remains central to Sri Lanka’s growth story. Post-war, the number of tourist arrivals has doubled, leading a boost in activity from retail firms and local and foreign hotel developers.

“Hotels & travel, diversified food and beverage, food and tobacco sectors have consistently traded at higher P/E multiples than the market over the past four years, which reflects their growth trajectory,” says Bandaranaike. “Manufacturing, power, land and property still trade below the market, and present attractive investment opportunities.” Bandaranaike adds that CSEALL has little or no correlation with major worldwide indices, thus making it a good diversification option for investors.”

Boosting foreign investment has been a major focus for the exchange. Together with the Securities and Exchange ­Commission of Sri Lanka (SEC) and Bloomberg Data Services, CSE has held “Invest Sri Lanka” forums in Mumbai, Dubai, Hong Kong and in London in order to take Sri Lanka’s value proposition global.

“So far we’ve been pleased with the high numbers of institutional, high net-worth investors and fund managers showing interest,” adds Bandaranaike. “Three or four years ago we would be dealing with established emerging market institutional investors, now the interest is broadening to a wider number of players.” Foreign funds currently contribute almost 37% of trading. The likes of Wasatch Fund, BBH Mathews Asia Fund, Malaysia’s sovereign wealth fund Kazana, Aberdeen Group are among leading foreign funds who have invested the market.

Speaking at the most recent Invest Sri Lanka forum in London, Gordon Fraser, fund manager and a member of the emerging markets specialist team at BlackRock noted that the long term prospects of investing in the country are the most attractive in the frontier market universe. “It is only in the last 18 months that we have put serious capital to work [in the country] and I would say that now is an excellent time to invest in Sri Lanka. I am very positive about the outlook of the economy. In my opinion, the best economic growth stories are supply side led. Here Sri Lanka can excel, adding infrastructure where it did not exist before,” noted Fraser. “The country is also adding port capacity to leverage its position on east-west shipment routes, transforming into a transhipment hub and working on the provision of more efficient and powerful power capacity. These very simple improvements will have a very large impact on the productive potential of the economy.”

Domestic investment is a high priority for the exchange, as Bandaranaike explains. “Education is a key element of creating interest in our market and promoting investment, especially amongst nascent domestic investors. Over the year significant effort was put into understanding, educating and inspiring retail investors.”

Last year CSE opened several new regional branch offices to capture a growing number of domestic investors. The exchange expanded its local footprint by setting up new branches in Anuradhapura, Ratnapura and Hambantota. Additionally the branches in Jaffna and Negombo were relocated to venues offering greater accessibility.

Still, CSE’s market capitalisation of USD$19bn (around 30% of GDP) is low compared to that of most other emerging markets in the region. The regional average is 168% whereas the world average is 74%. Increasingly market capitalisation to 50% of GDP is seen as a key target, and formed the basis of a 10 point action plan introduced by Sri Lanka’s Securities and Exchange Commission (SEC), along with the CSE, in 2013.