 Proposed changes to the visa on arrival facility in Colombo for all but citizens of Maldives and Singapore is just the sort of tonic one needs at the beginning of a year to remind investors the difficulties associated with forecasting future returns.
As expected the tourism industry has reacted noisily and requested the government to reconsider. On the upside, irrespective of whether the visa is introduced or not the sector should hold onto decent earnings for the year, unless there is a natural disaster or an unexpected rise in the price of oil. The price of oil is well and truly back on the radar after crude flirted above the $US 90 mark recently. Holders of Sri Lankan government bonds should cheer the visa-fee move as an added revenue stream, without raising local taxes.
The remaining sectors will be tied to both the performance of the global economy (with specific attention to Asia) and the temporary rally in soft commodities due to adverse weather events around the world. The rate of change for global growth will be lower in 2011 than it was in 2010 as it starts from an already high base, but this growth will be more stable and build on the strengths of 2010.
The states of sovereign, financial, corporate and household balance sheets impose different speed limits on recoveries and complicate global policy coordination at a time when the recovery remains highly policy-dependent. In particular, there is a considerable risk that banks in the Euro-zone may not use this time to rebuild their balance sheets.
Share prices are yet to find a post-war normal in Sri Lanka. While the rise over the past two years will not continue, value in companies with monopolistic pricing power still offer investors attractive total returns. Diversified conglomerates and cyclical growth companies look fully priced on moderate growth expectations for the world economy implying limited upside.
Outside of the rise in the price of global commodities (both hard and soft), the above trend growth in Asia will add to further inflation pressures locally and the difficult balancing act for the Central Bank of maintaining low cash rates to stimulate growth while controlling inflation. Fixed income investors should reduce duration (by investing on shorter term deposits) as a sudden rate tightening may be forced by rising food related social tensions as happened elsewhere during 2008.
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| File photo shows the first tourists to arrive in the country on January 1, 2011 |
On the currency side, global rebalancing will force at least a modest appreciation of the Rupee against the $US. For NRFC account holders, the pain of low interest rates amidst rising local cost of living will be painful for a longer period with no rate increases for most of the developed world in sight over the next year.
Commodity based currencies (most notably the Australian dollar and the Canadian dollar to a much lesser extent) will continue to provide the highest current yields through 2011. On a balance of probabilities, both currencies have the potential to marginally fall over the next year.
Property yields in Sri Lanka continue to be unattractive as prices in Colombo and immediate suburbs remain expensive. However prices further a field from Colombo (but within the Colombo district) remain attractive on a risk adjusted basis. Residential property has the least attractive return potential, whereas commercial property yields may be supported by increasing demand for high quality space. Investors are best placed getting access to this growth opportunity by investing in companies listed in the share market, with revenues from the sector as opposed to direct investing via an illiquid trust.
Recently relaxed foreign exchange rules allowing investors to invest in global markets would provide the best opportunity to diversify an investment portfolio across a range of high quality assets. The key fundamentals for equities (irrespective of where they are listed) are valuation, the outlook for earnings, and the liquidity backdrop. On all three counts, global equity market outlook still looks favourable.
True, one can always argue about which is the best valuation measure, but most suggest that equity prices are reasonably valued. For the global index, both the price-to-earnings ratio and the price-to-book ratio are at the low end of their historical range, while the dividend yield compares favourably to bond yields.
The New Year promises to be no different to any other year for an investor. The basic tenants of sticking to a long term, comprehensive financial plan to achieve personal goals for reasons that are important to you, should drive all investment decisions The single biggest risk to achieving returns this year won’t stem from markets (it never does), but it will come from you and your behavioural proclivities (as is always the case).
(Kajanga is an Investment Specialist based in Sydney, Australia. You can write to him at kajangak@gmail.com). |
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