INTERVIEW: COVID-19 and the Sri Lankan Stock Market: Looking ahead with confidence 

Picture-CSE Chairman Mr. Ray Abeywardena

The Colombo Stock Exchange (CSE) resumed stock market operations on May 11, 2020, following an extended closure as a result of the COVID-19 pandemic. In an interview released on Thursday by the CSE, Ray Abeywardena, the Chairman of CSE discusses the efforts of the CSE amidst the COVID-19 pandemic “and offers an outlook on the way forward for the CSE and the market”: 
 

How has the market performed since reopening on May 11 upon resuming operations as part of the Government’s efforts to return to normalcy in civilian life and to revive the economy? 

Even before the market recommenced trading, we were confident that there would be buying interest in the market given the attractive valuations the market continues to demonstrate. Although the two market days immediately after recommencing trading was somewhat of a decline and an overreaction as a result of the pent-up selling pressure, we saw that there was some degree of stability and normalcy that returned to the market thereafter, when investors realized that there was no need to panic while also realizing that there was good long-term buying opportunities. We have also been emphasizing on this ‘once in a lifetime’ buying opportunities in some stocks and just to offer some perspective some of these shares have been trading at price levels similar to what we saw prior to 2009, when the country was going through a war. We were convinced from the start that the market would not crash.
What we have seen post recommencing trading is that discerning investors have made full use of the buying opportunity to benefit greatly and we are proud to say that we have investors that see the long-term benefits of the market. The market continues to offer opportunities to those who have the capacity to buy and hold shares for a period of time to benefit from the true value of a long-term investment. In terms of foreign investors, we have seen a net outflow since recommencing operations which has been in-line with the trend we have observed in most regional markets and peer frontier and emerging markets. However, there is a misconception that foreign investors are only selling, which is not the case. We have seen Rs. 3.1 billion worth purchases by foreign investors in the market since recommencing operations, which shows that the attractive valuations the market displays is acknowledged by the foreign investor segment as well. We have also seen an interest in the market among Sri Lankans who are living or working overseas, which is a key segment of foreign investors that we have targeted through our marketing efforts over the years.
Locally we have also seen a substantial interest among individuals to open new accounts and trade. 800 new CDS accounts have been opened since May 11, which is 19 per cent of total accounts opened so far this year and quite substantial considering that we are talking about a short period of time. 
The ASPI at the end of trading on May 28 closed at 4,887.16 points while the S&P SL20 index closed at 2,057.70 points. Compared to the market open on May 11, as of May 28 the ASPI stands 315.53 points higher while the S&P SL20 Index stands 110.28 points higher. After making a substantial decline on the 11th and 12th of May, both indices have made considerable ground. The ASPI is currently at its highest point since March 13, which incidentally was only two days after the COVID-19 outbreak was declared as a global pandemic by the World Health Organization, which should offer you some interesting perspective on the progress of the index after some tough times. 
The S&P SL20 index during the week starting May 18, established two new all-time records for the highest percentage gain in the index within a day. During the same week the ASPI improved by 8.12% while the S&P SL20 Index improved by 15.88% which was a noteworthy growth in the indices.   
High volumes in terms of turnover, which is a reflection of trading activity has also been evident since the market recommenced operations, which has resulted in a Rs. 1.63 billion daily average turnover since May 11, which is 35% higher than the comparable year-to-date daily average turnover of Rs. 1.2 billion as of May 28. The Market Capitalization has also improved since recommencing trading, adding Rs. 120.6 billion in value, which also indicates progress and steps in the right direction. 
Due to the increased participation of local investors, the contribution of this segment of investors to turnover has crossed 68% over the past 13 days which is significantly higher when compared to the year-to-date contribution of 45%. Renewed interest among local investors I believe has been one of the biggest positives and has the potential to re-energize the market if this momentum sustains. 
 

What measures has CSE taken to guide listed companies during the COVID-19 pandemic? 

We have been proactively engaging listed companies, offering guidance on a number of regulatory matters with regards to operating in the listed environment amidst COVID-19. Right at the outset of the market closure period, we offered the required guidelines to companies on the steps that could be taken to ensure that vital investment related corporate information such as corporate disclosures, financial reports, etc are disseminated to the market in an effective and orderly manner amidst the unprecedented curfew period. Such information was therefore announced to the investor community by listed companies seamlessly throughout the market closure period. CSE also offered further guidance to listed companies on hosting AGMs amidst the outbreak, where taking into context the limitations of hosting public gatherings, the postponement of the AGM, Virtual AGMs, Hybrid AGMs, Vote by Proxy and other measures were recommended to listed companies and are practiced as we speak.   
In consultation with the Securities and Exchange Commission of Sri Lanka (SEC), we also offered momentary regulatory flexibility to listed companies with relation to the timelines for submission of financial statements, enforcement actions and other extensions/waivers to certain continuous listing rules, considering administrative and reporting challenges faced by listed companies during the curfew period. 
In a different perspective, recognizing the fact that we were very much in unprecedented times, we also requested listed companies to disclose the impact of COVID-19 on respective business performance/operations. This we believe was quite important in terms of offering the investing public clarity and valuable perspective as they would reasonably be concerned about the business impact of such an unprecedented event. CSE and CA Sri Lanka collaborated further in this regard, to issue a guidance note setting out the key aspects of the disclosure to be made by Listed Companies. 
The response by listed companies and the wider stakeholders for these initiatives have been excellent, and they have actively worked with the exchange to ensure that capital market obligations of listed entities are met during what was a truly challenging period. The CSE is pleased that we have been able to work constructively to ensure an effective dissemination of market information during this period.  

Looking ahead, what measures will the CSE take to popularize the market locally and to engage foreign investors? 

Since recommencing trading, we have seen a growing interest by the local public to learn about investing in the stock market and a new wave of potential first-time investors which has been refreshing. This interest indicates the tremendous potential upside of our market and the fact that the public has a strong appetite for investment options that offer attractive returns. 
A large portion of our efforts to popularize the market both locally and internationally ideally takes place through events and direct marketing. Considering that the present situation poses challenges to this mechanism, we have already adapted towards online sessions and e-events to create awareness on the market and we are seeing a good response for these programmes. On the other hand, an awareness drive for the stock market locally, through a fully-fledged integrated marketing campaign has been touted for some time and we plan to engage in such a campaign in collaboration with the SEC, which has been very welcoming to this idea so far. This would certainly help in popularizing the market going forward and would help us leverage on the growing interest in the market we have seen as of late. Yet, a campaign of this nature would also require the support of the wider stakeholder base in the market for it to be effective. 
I strongly believe that the stockbroking community also has a very important role to play in terms of popularizing the market and in converting leads and interested parties into investors and offering the guidance required, especially to new investors. Stockbroker firms are the client-facing stakeholder in our industry and probably have the largest role to play in terms of furthering interest in the market among the public and securing investments. I therefore urge my counterparts in the stockbroking community to capitalize on this interest and the attractive valuations we see in the market at present, to promote stock market investment aggressively and to the fullest extent possible. The CSE and SEC can fully engage in popularizing the market, yet an actual investment could only be secured through stock brokers. As it has been the case in the past, the CSE and SEC also I am sure stands ready to support the brokering community to really take our market to the masses. 
In terms of promoting Sri Lankan equities in foreign markets, we plan to very actively engage foreign institutional investors through online forums to communicate the way forward for the Sri Lankan capital market as part of a confidence building campaign focused on opportunities in the equity market. In terms of timing, we believe that doing this actively after the parliamentary election, where there is a clear direction on socio-economic policy and a strong and stable government will be ideal, considering the strong emphasis placed on the macro-economic environment by foreign investors. I also believe how effectively Sri Lanka has managed the COVID-19 pandemic in terms of preventing a major outbreak within the country, will be a substantial positive when engaging foreign investors, as it would leave us in a stronger footing compared to some of our peers. Hence the effort to engage foreign investors will certainly take place as a well thought-out initiative to effectively communicate the positives of investing in Sri Lanka.   

As businesses approach the post-COVID period, it is likely that seeking funding will be a top priority. How can the CSE help in this regard?   

CSE can help businesses achieve financial flexibility through offering a path to equity-based capital and given the current context financial flexibility is of utmost importance to a business.  
Fund raising has been widely spoken about recently as businesses and industries at-large learn to live with the realities of a COVID-19 central business environment. Traditionally Sri Lankan businesses have turned towards debt-based funding, which I believe in a post COVID environment is going to be difficult to access depending on the nature and state of the respective business. Many companies in fact would probably look at alternative sources of funding that would help reduce the debt burden. Equity-based capital certainly would be something businesses would be open to. Through the wide-ranging investor base in our market, CSE can offer companies access to a deep pool of investors and capital via a listing on the exchange. We believe that the investor community will continue to welcome well thought-out fundraising as we have seen over the years. 
On the other hand, CSE has the market infrastructure to also support the fundraising requirements of the government as well, especially in terms of tapping into public markets for funding development projects, etc and the private participation in initiatives of national significance. Very much like private entities, I expect that the government will also look at versatile and alternative sources of funding going forward and the stock market has the infrastructure in place to make that work. 
CSE offers equity-based fundraising options for companies of all sizes, from large conglomerates to SMEs, through our versatile listing platforms such as the Main, Diri Savi and Empower Boards. We also offer companies options to raise debt-based capital through our corporate debt market, which Sri Lankan corporates have often turned to meet their funding requirements. We therefore have versatile options available to address funding requirements of corporates. In consultation with the SEC, we are in the process of considering some broad listing rule changes, to make stock market listing a possibility for a wider spectrum of Lankan listed companies. 
These proposed amendments would create new avenues for potential issuers to meet eligibility such as through revenue and cash-flow pathways instead of profitability and proposes changes to the IPO process creates flexibility for companies. We are confident that these changes when in effect will complement Sri Lanka’s rapidly developing commercial landscape comprising of multiple new business models and segments.

How will the introduction of a Delivery versus Payment (DVP) system impact the market and when will it be introduced? 

The CSE has been working to improve the market infrastructure by laying the ground work for implementation of a DVP system over a period of time now and we are confident that the process can be completed and fully operational by the end of the year. 
CSE uses T+3 (trade date plus three days) settlement for both buyers and sellers in equity and operates on a non DVP environment where buyers are given custody of securities instantly on successful execution of a transaction whereas sellers are paid on T+3. The implementation of a DVP guarantees the transfer of securities only happens after payment has been made by the buyer. With DVP, the buyer's cash payment for securities must be made prior to or at the same time as the delivery of the security. 
DVP would enhance the settlement process in the local stock market and addresses a long-felt settlement risk concern among investors. In fact, DVP was first contemplated for the local market in 2011 and over the years CSE has actively worked with the regulator towards its implementation. A joint working committee comprising the SEC, CSE, Stockbrokers and Custodian banks has already been established to ensure that all policy and operational issues are addressed to facilitate a smooth transition.
The switch over to a DVP system is a major industry wide development in terms of infrastructure and risk management. With the introduction of DVP, we hope to also commence working with the SEC towards setting up a Clearing House which will act as a Central Counterparty (CCP) for settlement of securities, which will further enhance the post-trade risk management aspects of the local stock market, very much in-par with international best practices. DVP is therefore significant on many grounds. CSE is making a substantial investment in upgrading both its CDS and the ATS and connected systems and hardware to facilitate DVP because we strongly believe that it will propel the market to new ground. 

What are the areas identified for digitization of the CSE and have there been significant barriers? 

The CSE’s digital strategy going forward will consolidate on the digitization efforts implemented in the exchange so far, which dates back many years with the automation of the trading and clearing and settlement in the early nineties as one of the first exchanges in the region to do so at the time. Going forward we will look at the digitization of investor touchpoints to enhance experiences and interaction and focus on reduced turnaround times, scalability and cost efficiencies. Areas identified for digitization include the conversion of paper-based statements to electronic form, Online Account Access for CDS accountholders, Digitized Account Openings, e-Statements, e-Dividends, e-IPO, e-Listing Applications and e-Annual Reports. 
The proposed digitization strategy will be pivotal to developing a retail investor base as this will provide significant accessibility around the country through technology. This is envisaged in an end to end offering from digital account opening to trade settlement, eliminating the need for physical access to stock brokers. A vital part of this process will also be to work with the banking sector to ensure an availability of an effective digitized medium in the matter of settlement between the stock broker and the client. 
Broker to client and client to broker settlement happened to be the main barrier faced when considering operating the stock market during the curfew period in terms of post-trade settlement, as not all stock broker firms at present offer online transfers as a settlement option to their clients. This is the case even in current times, as there is a segment of clients of stock broker firms that prefer dealing with more traditional payment methods such as cheques for an instance, but this matter has to be looked at progressively by all parties involved including clients.
Addressing this will raise the broker client settlement process to be in par with the rest of the industry and is a top priority for the CSE and the regulator going forward. 
Regulatory approvals and Know Your Customer (KYC) policies will need to be assessed and amended where necessary to support this agenda and we will be working with relevant regulators on these aspects. We are presently working towards providing the mechanism for investors to open an account remotely and electronically in terms of technological aspects, and we need to address the KYC regulations as they require an in-person verification. The process of digitization therefore is not only about getting the technological aspects in order, but it is also significantly about ensuring that the regulatory framework also paves the way for digitization considering the modern context of a world that makes technological advancements every minute. Regulatory space therefore I would say, is a key determinant of digitization. 

The demutualization of the stock exchange is on the cards and has been so for some time. What is the way forward in this regard? 

In the perspective of the CSE, we strongly believe that this is the way forward and are eager to work with the SEC to make it a reality. Demutualization will separate trading rights from ownership rights and also broad-base ownership and enhance governance through the presence of independent directors. Demutualization will pave the way for members to unlock value and offer CSE the mechanism to grow as an exchange and even attract strategic investments which would be for the betterment of the Sri Lankan capital market. 
Unfortunately, the process faced a setback as the Demutualization Bill and the Bill for the proposed SEC Act did not go through. We are hopeful that the new SEC regime will consider recommencing this process with the blessing of the Sri Lankan Government and we will certainly make a case for demutualization as a positive development for the stock market at all forums. 

Finally, what is your outlook for the market for the rest of 2020? 

Collectively as Sri Lankans we have to take a positive view, we must take a strong stance and display the resilience that Sri Lanka is well-known for. If we do that I reckon we can quickly get back to normalcy. What we think is going forward, once the parliamentary election is held and once there is more stability in terms of the policy direction and once the impact of COVID-19 on day-to-day activities gradually declines, things will return to a certain degree of normalcy. We hope that companies also will be able to gradually overcome negative impacts to their business operations. 
The stock market at present offers an attractive opportunity and we have seen investors taking notice of this opportunity. We will need to see what the earnings forecasts are for our listed companies in the coming months to further understand the depth of the buying opportunity but there is potential to benefit if investors take a long-term view. We can expect local investors to continue the momentum they have shown during the past two weeks to further engage in the market. We are extremely confident that a quick progress towards an economic recovery in Sri Lanka, a decisive and stable policy outlook and attractive valuations for equities will put our equity market in the map again internationally. 
This is a time to work together and we are confident that we will rise to the challenge and hopefully by 2021 we will back to normal.