HK investors assured Sri Lanka will fix market liquidity deficiency
Lack of liquidity in the Colombo bourse and the relatively small market are among the foremost concerns for securities industry professionals in Hong Kong casting eyes at Sri Lanka, a nation that offers the most promising prospects in South Asia.
Some securities traders shared these observations when asked about their inclination to invest in equities in Sri Lanka, following an investor forum on Monday at the Shangri-La Hotel, ballroom A, where a 2-hour session (including coffee, tea and refreshments) would cost HK$68,000 (1.1 million rupees), plus 10 percent, at corporate rates. The forum was held to attract portfolio investment from Hong Kong.
Hong Kong, where commercial and residential real estate prices top the world leagues, is an ideal base from which to call on investors. The leading financial centre is awash with millionaires. More than 900 fund firms manage HK$8.2 trillion worth of assets.
Hong Kong is also home to wealthy Sri Lankans. For some of them at least Sri Lanka blue chips are the furthest from their minds considering their aversion to graft, the lack of rule of law, and discriminatory fiscal policies that favour the political class and its associates, and not the migrants whose US$ 6 billion remittances underwrite the economy.
The Sri Lanka investment forum was held in the backdrop of capital exiting emerging markets amid a steep rise in US 10-year bond yields which have gained more than 120 basis points since May. Macquarie Research estimates that foreign investors sold US$ 2.1billion of equities in
Malaysia last month and India saw almost US$ 1billion of net-selling by foreigners on top of US$1billion of selling in July. Credit Agricole estimated on Wednesday that US$ 16.5 billion equity capital had exited from Asia as of August 28, but that in the past two weeks US$ 4.9billion had returned.
Nalaka Godahewa, Chairman of the Securities and Exchange Commission, and Colombo Stock Exchange (CSE) Chairman Krishan Balendra, both acknowledged the liquidity concerns, while they underlined the positives of the evolving growth story in the post-conflict era.
Although liquidity is low in the market, “most companies” in the S&P SL20 index have “higher free floats” than the broader market, according to the CSE.
Liquidity refers to the ability to exit a stock at a market price. Concerns about lack of liquidity in the Colombo market are not new.
For the unconvinced and the undecided, Dr. Godahewa and Mr. Balendra offered reasons to reconsider, pointing to the highly literate and talented workforce, high average annual growth rates, planned market infrastructure upgrades, proposed product portfolio expansion, demutualisation of the exchange, attractive valuations relative to other regional markets, strong corporate earnings growth and high levels of disclosure by listed companies.
Central Bank Governor Ajith Nivard Cabraal emphasised political and macro-economic stability as well as the unprecedented scale of infrastructure undertakings, saying that a “new Sri Lanka” is being built.
Mr. Cabraal also attempted to ease worries about capital exiting emerging markets and the weakening rupee.
There were 120 participants according to the Hong Kong PR agency Citigate Dewe Rogerson. And there were 40 from Sri Lanka, including 21 brokers and representatives of six unit trusts. Neither the agency, nor the CSE would reveal names of asset management firms at the forum.
After the forum, another trader at a local securities firm said he was troubled by the high levels of debt, large fiscal deficits, and high interest rates. He noted that factors such as these, coupled with the lack of short-selling in the Colombo bourse, do not inspire investor confidence, despite solid growth rates.
Since the maiden sovereign bond issuance of US $500 million in 2007, Sri Lanka has raised US$ 4billion debt up to last year. Overall, the government debt to GDP ratio exceeds 80 per cent.
Fitch said just weeks ago that “rising external indebtedness’’ could make Sri Lanka vulnerable as “central banks of leading advanced economies tighten global funding conditions’’.
During question time, one participant asked why foreign direct investment targets have not been met.
Further addressing concerns about liquidity, Mr. Balendra and Dr. Godahewa assured that more companies are expected to list, including possibly, state-run enterprises, and that the minimum free float issue is being addressed. He admitted that most companies are tightly held. Most companies in the CSE benchmark index have a free float of “less than 5 per cent’’, according to the exchange.
As growth continues, foreign investors remain interested in Sri Lanka. Emerging markets fund manager LeapFrog Investments said a private equity fund it set up is exploring opportunities in Sri Lanka, especially in financial services.
It will not invest in public equities, Stephen Bowey, Partner and Head of Communications said on Wednesday. Sri Lanka is a priority for the fund.
Another speaker at the Hong Kong forum, Madhu Rao, Shangri-La Hotels and Resorts Vice Chairman, gave a vote of confidence, reiterating the warm, friendly nature of Sri Lankans. The HK-based group is building hotels in Colombo and Hambantota.
(See also Page 6 for additional details of this meeting)
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