Domestic and global economic factors make Sri Lankan equities attractive

Attractive valuations, global trade developments and a welcome shift in momentum following the Presidential election mean that Ray Abeywardena, Chairman, Colombo Stock Exchange (CSE) is looking forward to a positive 2020. “It is a new opportunity, a fresh start and where the price levels stand at the moment presents an attractive opportunity for first-time investors to experience the market.” In the following interview, Abeywardena discusses the stock market developments, the anticipated demutualization of the exchange in 2020 and why the listing of state owned enterprises, contrary to a common misconception, presents an opportunity for institutions to achieve efficiency and substantial growth.

Story image__0022_COlombo Stock Exchange_Advertorial

Excerpts  of the interview are as follows:

Coming on the back of a challenging few years, equities are seemingly recovering. Heading into 2020, what makes the equities market a compelling option for both foreign and local investors?

Ray Abeywardena: In terms of the performance of the indices, in 2019 the market was rather flat with investors taking a wait and see approach considering it was an election year. However, post the Presidential Election we saw an encouraging rally, especially among the retail investor community, with improvements in both trading volumes and price indices. This welcome shift in momentum sees us enter 2020 and a new decade with a sense of optimism.

On the macro front, especially where both local and foreign investors are concerned, the resounding victory at the Presidential Election will usher in a new era of political stability. We believe that investors will benefit from the new policies implemented by the newly elected president who has been rightly taking a people centric economic development program, a pro-business approach, local entrepreneur empowerment and further incentivizing investment. Some of these policies were already introduced during the latter part of the year in 2019 and should these policies make traction in achieving their objectives, we will see improved consumer, business and investor confidence. The anticipated low interest regime expected to complement these policies will also lead to greater focus on equity investment, as investors look to maximize on their value.

Since we are still at the very early stages of the momentum shift, the opportunity for investors to buy into equities at very attractive valuations still exists. The majority of the stocks are trading below their potential value. CSE is currently trading at a price to earnings ratio (P/E) of 10.68 times, and could be classified as one of the cheapest markets in the region which sets the ideal entry phase. Valuations certainly present investors with an opportunity however, this momentum shift is likely to have begun. Seasoned local and foreign investors would certainly look to capitalize on valuable investment opportunities in equities in early 2020.

There is certainly a line of thought in the global investment community that with trade tensions between the US and China and other geo-political tensions, emerging and frontier markets will be looked at for outsized equity returns. This is an opportunity for Sri Lankan equities. We do have very attractive valuations in the frontier space and as we are entering an era of political stability and a set of progressive economic policies, the Sri Lankan story may be an attractive one. However, it is not only about valuations, economic growth has to be revitalized in 2020 and progress has to be made in the macro front if we are to attract some of the funds that will be flowing towards Asian equities, and even fixed income. I believe that Sri Lanka has an opportunity in 2020 and we must capitalize on it, but let us also remember that we are competing for these funds with Asian peers. Our advantage is that Sri Lankan equities have remained relatively protected to market pressures when compared to other emerging markets.
How do we unlock these opportunities? What measures will be taken to improve investor accessibility and opportunities?

Abeywardena: We will continue to reach out aggressively to all the investor categories and have strategized in improving the services and accessibility. We are looking forward to working closely with the government to encourage investment by the local state Institutional Investor community, including the captive funds, which is of utmost importance to further strengthen and add depth to the stock market.

We will continue to engage the foreign investor community, an important Investor segment that accounts for 45% of our volumes. No doubt the changing scenario in Sri Lanka will be of interest to them and we will be taking this positive message out to them and the diaspora community in partnership with our stock broking community and our listed companies.

Another priority area of interest is our retail investor segment, which is largely underdeveloped. Many challenges remain in this area but we are committing a fair bit of resources together with the Securities and Exchange Commission of Sri Lanka (SEC) to expand the local investor base.

As you know, we maintain a network of eight regional offices spread throughout Sri Lanka and together with SEC and the stock broking community we conduct over 500 awareness programs annually in all parts of Sri Lanka and all three mainstream languages. In terms of accessibility, we are working on capitalizing on technology, especially smartphone penetration, to make the process of trading simpler and more accessible, from the act of creating a depository account to trading and actively managing your portfolio. Investor convenience is a key focus at CSE and we’re proud that investors can now access and contact the CSE through more mediums than ever before. We continue to embed greater accessibility to investors and social media will play a bigger role in 2020.
What makes this an opportune moment for retail investors, especially new investors, to invest in stocks? And, how should they approach investing in the market?

Abeywardena: It is a new opportunity, a fresh start and where the price levels stand at the moment presents an attractive opportunity for first-time investors to experience the market. But if you are a new investor, we recommend that you spend some time understanding how stock market investment works, understand how one can identify, minimize and manage risk and seek professional advice through an investment advisor of a stock broker firm.

In the reverse of the usual public perception, the ideal time to enter is when the stock market share prices are at low levels. What we have seen is that when the market is in a bit of a bear run, that presents more opportunities to buy and collect stocks as the price levels are low. Presently, the majority of the shares listed are trading below book value. These are good opportunities for potential investors. For a new investor, investing in the stock market can be an unfamiliar business, therefore, a number of elements need to be considered when you turn your mind to the prospect of investing in shares. Choosing a stock broker firm is probably one of the most important decisions you will make as an investor. It’s important to choose an experienced firm with a good track record and an investment advisor who is capable and committed to the cause. Find out for yourself whether the broker firm adheres to a high standard of ethical behavior and fiduciary responsibility. Any investment activity entails gathering knowledge. Especially with share investments, you have to be prepared to ‘do the homework’ on the companies you are investing in. This means you have to keep abreast of what is happening in the country, industry and elsewhere which may affect your investment.

Spreading your money across various companies and sectors helps reduce the overall level of risk. Not every investment decision you make will produce the desired result but spreading them evens out the odds. And finally, the manner in which you approach the stock market depends on your time frame. In general, investors who take a long-term view of the market reap the most rewards.

What‘s the outlook for new listings in 2020? Why should companies consider raising equity capital?

Abeywardena: As the market gains momentum, we believe that some of the companies that have been waiting in the wings will list in 2020 and beyond. Our discussion today largely centers on a new opportunity through stability and growth. Potential issuers are a key beneficiary of this new opportunity as well and when attracting companies, continuing market momentum, greater investor engagement and sentiments driven by a well-performing market in 2020 are of utmost importance.

We are working on creating an exciting opportunity for issuers by broadening the listing criteria so that the new world companies, such as tech companies, will have the opportunity of raising market-based funding. This no doubt would create exciting times and new opportunities for investors. We expect this game changing process to happen in 2020.

To answer the second part of your question, a public listing acts as a strong funding source for companies looking to capitalize on substantial business and growth opportunities. It gives financial freedom and flexibility to the business. Financial flexibility, I strongly believe, is one of the most important ingredients to achieving success in business. Traditionally Sri Lankan businesses have turned towards debt-based funding in the initial stages of their lifecycles but as you mature as a company and as a business owner, turning to equity-based funding will always help you open the business up to new possibilities. On the part of the stock exchange, we have looked to create new and relevant avenues through which the stock market could expand its scope in terms of attracting companies. Companies now have a wider range of opportunities from a SME company to a mid-sized company to the larger cap companies and going forward, tech companies as well.

Listing of State-Owned Enterprises has been widely discussed but little progress has been made. What is your view?
Abeywardena: First of all there is a common misconception with regards to the Listing of SOEs. Many tend to think that this leads to, or refers to, the privatization of public enterprises. This perception problem is one of the main reasons for governments to not pursue SOE listings in the recent past. However, a listing on the Exchange is certainly not privatization. SOEs can be listed by introducing a fraction of its stake to the market.

By doing so the state does not lose control of the listed SOE, but it creates an opportunity for the enterprise to raise market based funding and gives it financial freedom to do so.

In the past we have seen quite a number of SOEs listing on the stock market and growing while maintaining the state’s interest. It also presents an opportunity for the public to own a share in that enterprise and be part of its growth, including the employees. I believe SOE listings would enable the CSE to achieve a much larger market capitalization and would enable such institutions to achieve efficiency and substantial growth. It would also make those institutions far more productive, accountable and transparent, which will benefit the government, the public and the SOE itself in many ways.

In terms of accommodating these listings on the market from an operational perspective, we have the necessary infrastructure and the regulatory framework already in place to facilitate SOEs at any time. In terms of the readiness of the investment community, I have no doubt that there will be an appetite on the part of the local Sri Lankan investors to engage in an SOE IPO purely because of the sheer size, strong brand and success that some of the SOEs have achieved over the years.

In addition to what has already been discussed, what are the other key developments we could look for in 2020?

Abeywardena: We would like to see 2020 as a year where we get closer to our stakeholders. With the new listing rule changes discussed, we anticipate that we will interact with a new wave of potential issuers keen to raise capital under the new framework. With the market continuing its momentum and stabilizing in the post-election period, we plan to welcome a new generation of first-time investors to our market and will be implementing changes within the industry in an infrastructural and risk management capacity to accommodate the growth we want to achieve.

We continue to focus on improving post-trade services to minimize post-trade risks, a material concern for investors. The proposed launch of a Delivery Vs. Payment Model (DvP) will be a significant achievement for the CSE, significantly reducing post trade risks such as asset commitment risk. This will certainly also help when attracting further institutional funds into the market in the coming years. Operationally, we anticipate that the demutualization of the exchange is likely to be implemented within 2020, with the new parliament possibly approving the bills for demutualization and the new SEC act. This will commence a transformative period for the stock exchange in terms of how we operate as an organization and pave the way for the growth of the Sri Lankan capital market.

It’s going to be a year of change for all of our stakeholders and we look forward into the future very positively with many new exciting developments that have been initiated.