INVESTOR FORUM
Compiled by Tamara Rebeira
INVESTING AMID UNCERTAINTY
Christine Dias Bandaranaike examines investment risks and opportunities
Q: In your view, what are the factors currently shaping investment decisions in Sri Lanka?
A: A mix of both domestic economic conditions and external global pressures is shaping investment decisions today.
The conflict in West Asia has highlighted global interdependence and Sri Lanka’s exposure to external shocks through energy prices, tourism, trade and shipping. We are already witnessing these risks feed through to inflation and external sector conditions, adding uncertainty and volatility at a time when the recovery was providing some comfort.
As investors, we monitor several key macroeconomic indicators that influence both risk and return expectations.
The first is the direction of interest rates, which reflects the cost of money in the economy. Higher interest rates, as inflation picks up, make borrowing more expensive while also making fixed income investments more attractive relative to equities.
Secondly, the sustainability of the economic recovery remains critical. The economy grew by 5.1 percent in the first quarter but we need to consider how resilient this growth is to external shocks.
Tourism, exports and remittances remain important indicators to watch in assessing our external position. While exports and remittances have remained resilient, the recent slowdown in tourism highlights the need to ensure that the recovery remains broad based and sustainable.
The trajectory of inflation is a key consideration as it directly impacts real returns. Going forward, we will see the impact on inflation from many different sectors affected by energy prices, as we saw during the oil crisis of the 1970s.
Again, it seems clear that the world powers must intervene to prevent a global humanitarian crisis.
Political and IMF related stability act as a confidence anchor for markets. Reforms and continued support from institutions such as the International Monetary Fund have helped strengthen investor trust.
Q: What advice would you offer to new or first time investors – and what common risks should they be mindful of in the current market environment?
A: Don’t try to find the right investment – instead, ask the right questions, such as ‘am I actually able to invest this money now?’; ‘what return do I expect?’; and ‘what are the risks I’m prepared to take and how long can I stay invested?’
This approach moves you from emotion and towards structure. Before you invest, build a strong financial foundation including an emergency fund covering a few months of expenses to ensure that unexpected cash needs do not catch you off guard.
Diversification is important too.
Rather than investing in a single asset or sector, plan to invest across different asset classes for greater return stability until you gain investment experience. Evaluate your portfolio as a whole rather than in silos. When in doubt about how to invest, unit trusts are a great tool.
At the same time, first time investors should be mindful of common risks. Market volatility, interest rate changes and inflation will affect your returns at some point – you should expect them to.
Behavioural risks such as reacting to short-term market movements or following popular trends can also sabotage you. Ponder first and think long term – trust that time will be on your side.
Q: How has digital technology transformed the way individuals and institutions invest, manage portfolios and access financial markets?
A: Digital technology has transformed awareness of financial instruments, investing and market access. What was once a quiet insiders’ club is now far more accessible, transparent and efficient.
Digital platforms reduce tedious paperwork and often improve transparency. This ease has led to a sharp increase in retail participation with savvy younger investors entering the market earlier than ever before.
Information dissemination has also improved dramatically. Investors today have access to real-time data including advanced analytics.
However, more information can also lead to information overload, making it difficult to distinguish insights from noise and fundamentals from trends. Social media has become a key influencer, sometimes encouraging herd behaviour.
Rather than investing in a single asset or sector, plan to invest across different asset classes for greater return stability until you gain investment experience
We have seen the Securities and Exchange Commission of Sri Lanka (SEC) step up to issue statements on misinformation and frauds.
Q: What is your outlook for the investment management sector over the next few years?
A: I believe that over the next few years, we will see far more Sri Lankans engage with the capital market.
If we consider the worldview that Robert Schiller expressed after the 2007 global financial crisis, our investment management sector could evolve to provide risk sharing and nation building. I believe the sector will do so – and improve investors’ financial wellbeing by providing opportunities to grow long-term savings including retirement savings.
Unit trusts facilitate the pooling of capital and enable households to participate in opportunities that would otherwise be inaccessible to them.
Given the government’s fiscal constraints, a larger share of the investments necessary for productivity led economic growth will come from the private sector through mobilisation of long-term capital from households.
At present, Sri Lanka’s investment sector accounts for a woefully low share of GDP, at around 1.8 percent compared with nearly 20 percent in India. However, there is considerable room for expansion as financial literacy and retail participation continue to gain ground meaningfully.
