CAPITAL MARKETS
Compiled by Prashanthi Cooray
STOCK MARKET CONSOLIDATION
Thinushka Soysa weighs in on the emerging outlook for and growth of equities
Q: What is your outlook for Sri Lanka’s equities market – and what factors are driving investor sentiment? And what challenges do you see going forward?
A: Sri Lanka is just coming out of a hard few years, during which a perfect storm of self-inflicted and external shocks culminated in sovereign bankruptcy.
However, the economic crisis has been a blessing in disguise as it enabled us to implement politically sensitive structural changes that should have been brought in decades ago. We are now on a recovery path and going from strength to strength on the economic front.
The stock market is seen as the barometer of the economy with investor sentiment reflecting the roller coaster ride of recent economic and political changes, as well as renewed optimism from political stability and economic recovery.
Apart from sentiment, the key factor driving the Colombo Stock Exchange (CSE) has been changes in interest rates, which have an inverse relationship with the market.
Currently, the market is consolidating following the post-presidential rally. I believe we will see a resurgence of normalised market activity where economic, sector and company factors will form the foundation for multiple expansions, leading to slower but sustainable market growth going forward.
Apart from Sri Lanka deviating from its current progressive path, the main challenges are external shocks that may arise from global volatility and changing international engagement rules.
Q: What sectors do you believe are poised for growth – and why?
A: If Sri Lanka stays on the path of the IMF programme, maintains political stability and policy continuity, implements important structural changes, increases transparency and good governance, and improves the ease of doing business, it can expect a broad based recovery across all sectors, potentially leading to an economic renaissance in the long term.
In the immediate future, several sectors stand out. As the engine of economic growth, the banking sector is likely to be the first beneficiary. Meanwhile, the relaxing of vehicle imports, and recovery of the micro, small and medium sized enterprise (MSME) and SME sectors, will likely benefit diversified financials.
Electricity tariff reductions, budget relief, and strong tourism and inward remittances will benefit consumer discretionary sectors, while increased government capital commitments will eventually spur the construction industry.
Q: How can Sri Lanka attract more global investors to its capital markets?
A: Historically, Sri Lanka has had a healthy level of foreign participation in its capital markets. While recent events and global uncertainty have led to an exodus in recent years, continued recovery and an upward sovereign re-rating could quickly return Sri Lanka to the broader foreign investor radar.
Apart from economic factors, expanding the breadth and depth of our stock exchange, introducing new product categories and increasing liquidity are also key to making the market attractive to foreign investors.
Recent progress indicates that this long overdue capital market expansion is finally underway.
Q: What advice would you offer those who are looking to enter the local stock market for the first time?
A: Do not invest amounts that would materially affect your lifestyle if they’re lost! Equity is among the riskiest asset classes – and both global and local markets have been notoriously volatile in recent times. While this presents ample opportunities for compounded returns, it also increases the probability of losses.
The first step is to assess your risk tolerance – and align it with your overall investment objectives.
As a retail investor, if you choose to invest directly, it’s important to undertake your own research. A simple starting point is reading the news daily. Additionally, take a top-down approach – familiarise yourself with the economic trajectory, identify promising sectors and focus on well managed listed companies in those sectors.
Read reports on the economy, and examine company annual reports and shareholder movements. While the initial deluge of data may be overwhelming, it’s important to do this to evaluate the quality of external investment advice you receive. If you lack confidence or expertise, consider investing in the CSE through a reputable mutual fund.
Be mindful of transaction costs and avoid acting on emotion. It’s easy to get caught up in the excitement of a rising market or panic during a declining trend and trade impulsively.
Your investment advisor may benefit more than you in such scenarios.
To stay disciplined, maintain clear investment records showing your profits, losses and transaction costs – including trading costs, margins and broker credit costs.
Liquidity is king. Financial markets are often first in the line of fire; and in an increasingly uncertain world, it’s best to have an exit strategy in place rather than be stuck with illiquid stocks – especially if your holding power is limited.
All things considered, Sri Lanka appears to be on a progressive and sustainable recovery path. Recent developments suggest that we are heading in the right direction.
