LMDtv 2
Sri Lanka’s investment climate is turning a page for the better and capital markets are performing well. During a recent LMDtv interview, the Chief Research & Strategy Officer of First Capital Holdings Dimantha Mathew said that the market offers many opportunities for investors
What’s needed is awareness and cautious optimism, he added.
He noted: “We’ve seen a significant decline in interest rates and this low interest rate environment has created a significant benefit for businesses as a whole – companies are enjoying lower finance costs and increased earnings. With all these developments, we’ve seen the equity market booming in the last couple of years and attracting significant interest as well.”
Mathew explained: “When interest rates were high, investors were chasing after yield; they were looking for the highest yielding assets, which were government securities and fixed deposits.”
He added that with interest rates dropping, “the best alternative liquid product is the stock market. There is a significant flow of funds from fixed income to equities; and if you compare previous cycles with this one, you’ll see a large new set of investors entering the capital market space.”
It is widely believed that the capital market is somewhat limited to a select set of investors, partly due to the need for financial literacy.
He explained: “Although literacy levels are high in Sri Lanka, financial literacy levels are pretty low. We have seen an increase in awareness campaigns, including those conducted by the Central Bank of Sri Lanka, to raise financial literacy and foster understanding.”
“With these initiatives, we are seeing a larger set of investors entering the market, opening accounts and trading. This is another reason why the equity market is booming,” Mathew added.
However, there’s also a need for caution, he stated: “Sri Lanka has enjoyed a continuous upward trend – a bull run in the stock market; and it has been at an all-time high and valuations are picking up. It’s now at a level where investors should be somewhat cautious and selective about their choice of shares.”
“Cautious optimism is required,” he noted, citing two reasons: the first is the rising valuations; and the second is that though Sri Lanka is coming out of a crisis, it won’t take a lot for it to sink back into another predicament.
Mathew warned: “It depends on how many reforms the government is conducting and how fast they’re being done – a couple of months in the wrong direction could take us back to the place where we were a couple of years ago.”
“We’re heading in the right direction but since there is a lot more to do, investors have to watch out for what is happening. The capital market is a rather complex investment product – so if you’re investing, you have to be on the ball and stay informed about what’s happening in the environment and the economy,” he stressed.
Mathew continued: “You have to educate yourself on the investment products available; because if you invest properly, your returns are higher – but higher returns come with higher risks.”
For investors who don’t have time to undertake research, there are options such as unit trusts where specialised fund managers will manage investments, he pointed out: “So you either do it yourself or seek the support of one or some of these funds.”
And he advised that “it depends on the investors and how much time they can spend on educating themselves. The best way forward is to back your investments with knowledge.”
Mathew urged: “Invest in the right investment product that’s suited to you because you can diversify your risk depending on your risk appetite. If you’re a low-risk person, there’s a separate set of products for you. And if you want to take a slightly higher risk and have some knowledge of the market, you could opt for a different set of products.”
“Learn and educate yourself before beginning to invest – because there’s a lot of money to be made,” he concluded.
