Stock market analysts are predicting large inflows of foreign funds into the Colombo Stock Exchange from next year and are expecting the rupee to strengthen against the US dollar on the back of it.
“The Sri Lankan stock market will attract a lot of foreign interest from next year.
Michael Preiss |
The cycle of the rupee depreciating will also end. From next year there will be pressure on the rupee to appreciate,” Economic Advisor to Ceylon Asset Management, Michael Preiss, told the Sunday Financial Times in an interview.
Mr Preiss is a specialist on financial markets in emerging economies and was responsible for launching Ceylon Asset Management’s ‘Ceylon Index Fund,’ the fist index fund of the Colombo stock market. He says that a combination of internal and external factors will pull foreign funds into the Colombo stock market.
Externally, interest rates in western countries are coming down (already below 1% in many western countries) and fund managers are looking for better paying places to park their money. Internally, Sri Lanka’s comparatively higher interest rates, coupled with post-war stability and unavoidable reconstruction activities, offer high returns investment opportunities.
“The situation in Sri Lanka will be driven very much by global forces. The interest rates in the west are so low that emerging markets are becoming more attractive to investors, and Sri Lanka’s currency can only appreciate with time. The internal situation, a country coming out of a war, is also such that markets can only improve,” said Mr Preiss.
Boom
The stock market is expected to attract foreign funds faster than Sri Lanka can attract foreign direct investments. “The stock market is more liquid and capital gains are tax free. Also, as a general rule, in situations where interest rates are low, the stock market does better. At this point Sri Lanka’s interest rates are coming down. So money will come into the stock market faster than into other investments,” said Mr Preiss.
In addition to individual investors, large investment funds are also expected to use Sri Lanka to diversify their investment portfolios. “The negative war related publicity is changing. When the publicity improves from next year large pension funds and mutual funds will look at Sri Lanka. When these come in, there will be enormous pressure on the market and for the rupee to appreciate,” said Mr Preiss.
Stronger rupee
Due to large inflows of foreign exchange the rupee is expected to strengthen against the dollar by end 2010. “By end of next year I would expect the rupee to appreciate by about 10% against the US dollar,” said Mr Preiss.
Faster growth
With the North and East joining the country’s production process, and tourism picking up Sri Lanka’s GDP growth next year can hit between 6% - 10%, says Mr Preiss. He expects to see biggest growth from the regions outside the Western Province, again because of the current extremely low base.
“Sri Lanka managed about 6% growth even with a war and very high interest rates.
Now the market size will grow because of the North and East coming into the picture. Interest rates are coming down, insurance costs are reducing and there is stability. So next year Sri Lanka’s growth rate can be in the range of 6% - 10%,” said Mr Preiss. |
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