It would be wishful thinking to assume the economic chaos caused by the Coronavirus pandemic will somehow return to normal in 2021. Economic stimulus packages have been crucial to maintaining some momentum. However, all over the world, the stimulus has been provided with Central Banks printing money.

Compared to about Rs4 billion of net money printing in 2019, Sri Lanka’s Central Bank unleashed a flood of about Rs800 billion in printed money in 2020. All this liquidity will not be without consequences, which includes higher inflation.

Three of Sri Lanka’s top fund managers joined a recent Echelon round table discussion discussing the economic outlook for 2021 and how they plan to craft a portfolio strategy dealing with the consequences of the downturn, and the new challenges of the massive stimulus. Joining the round table were Niloo Jayatilake, Chief Executive, Softlogic Invest, Dilshan Wirasekara, Chief Executive of First Capital Holdings and Kanishke Mannakkara, Chief Executive of CAL Investments.

Here is an abridged version of the discussion.

Dilshan this is a challenging time to be allocating assets. Can you tell us about the portfolio you are overlooking at First Capital? How large is it and what does it consist of?

Dilshan: First, I am not sure I agree with the title ‘Beast Awakens’ because I don’t see it like a beast. I think inflation (the beast) can be tamed. I’m not too worried about inflation.

About First Capital. We are a fully-fledged investment bank. A large part of our business consists of a primary dealership for government securities. We are the largest non-bank primary dealer, we take up about 15% of debt issuances the government makes at auction.

Apart from that, we are also into asset management, where we manage Rs40 billion. We also have an equity brokerage, fairly small in size, considering our other operations and we offer corporate finance and debt structuring services predominantly in the fixed income space. We structure on average Rs25 to Rs40 billion of debt issues a year. That’s a fee-based income for us.

You are managing assets of Rs40 billion, that is in addition to your primary dealership where you run a bond portfolio on your own account. Can you put a figure to the bonds?

Dilshan: That number changes. In the current interest rate environment, we are not bullish on bonds. Our balance sheet size as of September 2020, the last published dates, is close to Rs80 billion.

CAL is an investments bank. It is also a primary dealer. However, Kanishka, you manage CAL’s asset management business. Can you tell us about that?

Kanishka: I’m the CEO of CAL Investments. We manage around about Rs60 billion in client assets between unit trusts and private wealth management. CAL Investments is a part of the Capital Alliance group. It manages third-party client assets, of corporations and high net worth individuals. And we do Private Wealth Management for the high-net-worth individuals.

Niloo, you are the chief executive of Softlogic Invest. Is this the outfit that manages Softlogic group’s assets?

Niloo: Softlogic Asset Management is the asset management company of the Softlogic Holdings group. It manages over Rs27 billion in assets including the life insurance portfolio of Softlogic Life. We also manage discretionary client portfolios’. Recently we launched Softlogic Invests which manages assets for retail clients through a money market fund and an equity fund.

I’d like each of you to take a couple of minutes, for any opening thoughts with a focus on the economic outlook?

Dilshan: It’s been an unprecedented year, 2020, for the economy. We’re going to see the largest economic contraction we’ve known in 2020. We estimate the contraction to be around 5.8% of GDP. However, I think it’s important to choose to be optimistic in this environment. I think we’ve, sort of, hit rock bottom. It can only get better from here. The most significant issue the economy faces is the government revenue constraint, and that is mainly because taxes have been cut. Second, a lot of our taxes are collected at the border, so import-related taxes. Import restrictions have reduced the potential for these taxes.

The government seems to have lost sight of this and that is a big concern. How would the government navigate tax revenues back up? I think anyone who has the answer to that question, can predict the outlook for the economy confidently.

But as I said, it can only get better from where we are. In 2021 we project the economy will grow 2.5% to 3%, from an almost 6% contraction in 2020. But essentially, my take is that 2020 has been the worst year that we’ve ever seen in our lifetime, and it can’t get worse, it can only get better.

Kanishka, we’ve hit rock bottom? Do you agree with that? Several foreign currency debt repayments are coming up. Is this rock bottom?

Kanishka: I think this is the rock bottom. Maybe for the first time in my life, I’m more optimistic than Dilshan. I think rock bottom was a few months ago. I’m of the view that we are in the second half of this crisis, I don’t think the crisis is over. From a global perspective, there’s going to be more good news than bad news over the next 12 months.

I do expect the global economic activity to return to normal in 2Q or 3Q of 2021. Our forecast for Sri Lanka for the second half of 2021, is that economic output might return to levels we saw in the second half of 2019. We forecast the economy to contract 6% in 2020. From a purely mathematical perspective, there will be very high growth in 2021. Essentially the economy goes from 94 to 100. If you break this up, in 1Q 2021 we are forecasting to still have negative growth. But in 2Q, 3Q and 4Q 2021, we expect high growth.

A little note of caution here. If we see 8% or 9% growth in one of those quarters, that doesn’t mean we’re becoming like China. What it just means is that the slack in the economy is being put to use again.

I’m expecting inflation to be back with a vengeance. That’s something everyone should plan for and then the rupee may come under pressure in the second half of 2021.

Niloo: So, when you read a book, you start with the first page. But I’m going to start at the end here. I forecast the economy will spring back to life because this pandemic is a once a century type of event. This bounce-back will be stronger and quicker than most of us expect.

We forecast that GDP will shrink by 6% in 2020. The quarter swings in 2021 will be significant, so it’s not going to be a smooth recovery. But the world is going to come back and come back stronger.

How many of forecast that in 2021 Sri Lanka can draw back the entire GDP reversal it experienced in 2020? So, to make this easy let’s talk about simple annual averages here.

Kanishka: In the second half of 2021 I expect economic activity to reach levels we saw in the second half of 2019. But it’s important to note that even in the second half of 2019, we saw excess capacity in the economy. So, things were not running at full steam even then. That’s something to bear in mind. But we won’t claw back all the losses in one year

Dilshan: So the simple answer to your question is no, I don’t think we will claw it back in one year. If you put it into numbers we are forecasting a 6% contraction in 2020 and 3% growth in 2021.

Niloo: Our growth forecast for 2021, is between 4% to 5%. The rebound, driving this growth has to be tourism. Where else is the growth going to show? Private sector credit will pick up to around 9% growth in 2021 and consumption has to pick up.

Remittances will fall in 2021 because we had an unnatural growth this year as workers who lost their jobs came back and brought all their savings with them. The apparel industry, which is the export earning arm of Sri Lanka, will rebound in 2021 as its main market the US, where 38% of exports go, will have GDP growth and markets like the UK and Europe also will see a consumption recovery. Vaccine availability will benefit rich countries first. So our exports will benefit more than tourism or other sectors.

Each of you manages multi-billion rupee portfolios. COVID has popped up many uncertainties about the economy. Each of you will depend on forecasts to invest money. My question to you is, which macroeconomic numbers, most critical for investing, are most difficult to forecast in this climate?

Dilshan: I think, they’re all probably equally difficult to forecast. But I would think, inflation is a little bit harder for me to interpret because so many other things affect that. So I would, if I hadto pick one, inflation is the most difficult.

Kanishka: For me, it’s interest rates because we believe inflation is very likely to rise anyway. Interest rates are more policy driven especially in Sri Lanka. And it’s hard to forecast the political pressure the government will be under in, say, nine months from now.

Niloo: Interest rates are the hardest to forecast. Inflation levels will impact interest rates anyway.

What do you think the GDP deflator or inflation, in general, is likely to be next year? I’m trying to figure what level of inflation you are using in the economic growth forecasts?

Kanishka: Our model shows inflation around eight to 10% by year-end, which is a significant increase from where we are now. I don’t expect much inflationary pressure until June or July 2021. We forecast it will pick up in October, November and December.

Dilshan: Currently we target inflation at 4% to 6% and the Central Bank has managed to keep it within that range. I think for the last couple of years. Inflation has remained at single digits since the war ended in 2009. So we’ve all now got used to single-digit inflation. Some of you may remember we had inflation at 25% in 2008. It’s a very different scenario now but definitely, inflation will increase. But I think the increase is going to be in the region of about 2% to 3% from where we now are. So it will go to 6% to 8% range In 2021.

Niloo: Inflation depends on aggregate demand and credit growth. So these are the two fundamental factors that drive inflation. I believe, until the middle of next year, aggregate demand will be low. So inflation would remain at around 5% in 2021 in the first half of 2021. But thereafter, in the second half of 2021, with credit growth picking up to 9% our forecast is for inflation to rise to 9%.

What will happen with interest rates in 2021?

Niloo: At the end of the day, how a country is funding its debt is the biggest question. Is it domestic? Is it external funding? Now, It’s very evident with the Central Bank governor and the state Minister of Finance all talking about the growth of the economy in 2021, that indeed economic growth is the focus. So to spur growth, they are going to maintain interest rates as low as possible. So it also looks like they are not going to the IMF, till they have no choice but to go to the IMF.

That’s why I think it’s going to be difficult to judge where interest rates are going. However, rates cannot fall beyond the current level. When rates do rise they will go up by 200 to 300 basis points.

Dilshan, you’re running a business where your fortunes are very sensitive to interest rates, what’s the expectation?

Dilshan: I also agree with Niloo, I think we’ve seen rates bottom out, I don’t believe there’s room to ease rates further. One thing to note is that we are seeing real rates being negative. For a while, savers had been used to a 4% to 5% real return. For the first time in a while, we are seeing negative rates. So investors are moving away from fixed income and looking at alternative asset classes.

The Central Bank seems to be focusing on modern monetary theory and saying we can print money, and essentially kick the can down the road by postponing problems. So that’s a lifeline that we’ve seen. Currently, Central Bank holdings of bills are at an all-time high of about Rs650 billion. Close to Rs800 billion have been printed in 2020 alone. Part of that is reflected in the excess market liquidity. Currently, about 250 billion in the interbank market is in excess.

The government also has said that they will borrow locally and not from overseas markets in 2021, to fund the deficit. And that makes sense as the rates are low. The borrowing rates in rupees are lower than the borrowing rates for the government in dollars. Our ISB’s trading between 17% to 25% in the secondary market, so we can’t borrow in foreign currency at a reasonable rate today. So we would probably go to China and India for a bilateral arrangement.

Inflation is going to rise. But I don’t see that being demand-driven. So just because there’s cash out there, I don’t think people are consuming.

Over the last three months, the treasury bill and treasury bond issues have gone undersubscribed. So the government is not raising the amount that it wants to and as a result, the Central Bank is taking up the balance and that holding is ballooning.

How and when can the Central Bank unwind this position? And then if they want to unwind a large position, of RS 600 billion, how can they do that unless the rates are higher?

Dilshan: A large part of that is in treasury bills. Of the Rs650 billion, I would say probably about 90% are in bills. So it’s all going to mature within the next 12 months.

How can the government raise funds from somewhere else to repay that?

Dilshan: I don’t think the Central Bank will dump that to the market. So going back to your first question I feel for the next six months we can still keep printing and sustaining these low rates. But after that, there will be some pressure. So we are expecting a 100 to 250 basis points increase for 2021 in the benchmark rates and another 100 basis points increase in 2022.

Do you think in these two years, when you expect a 2.5% rise in interest rates the Central Bank can unwind most of its treasury holdings?

Dilshan: One could argue, that number can potentially go up to Rs2 trillion and still be able to sustain that over a couple of years’ before retiring it. So that’s why I say rates are not going to go up immediately.

Kanishka: I would argue that things are a little more sparkly than they appear. I think rates have probably 200 to 300 basis points to go in 2021. What’s important is that we think inflation will rise faster than that. So you’re talking about a drop in real interest rates. So an increase in nominal interest rates of maybe 2% to 3%, but also a drop in real interest rates of maybe 2% to 2.5%.

In terms of the Central Bank being able to unwind its positions in 2021? I don’t think it will be able to because there is a large budget deficit which will increase further 2021 because we are going through a fiscal stimulus. And I don’t think it’s a bad thing at this time. But it’s going to result in a large budget deficit. So there’s going to be additional printing, I expect the Central Bank balance sheet to grow throughout 2021 and I suppose this is why I am expecting inflation to kick in.

And then do you think inflation will continue into 2022?

Kanishka: Inflation is not like a thermostat that you can dial up and down when you want to. Inflation is driven by expectations and that’s what’s dangerous about it. So once it gets going, it’s not so easy to control. When we had 20% plus inflation around 2008, it took us a good six years to bring it under control. I’m not expecting it to go back up to those levels, but once you open that Pandora’s box, putting inflation back in place will not be easy.

Niloo any thoughts about how this liquidity is going to be unwound by the Central Bank?

Niloo: I agree with Dilshan. I don’t think the government will have the capacity to unwind in 2021 with the budget deficits almost at 10%.

Globally, quantitative easing or printing money is the strategy they are following even in developed economies. If you look at Japan they have printed so much, and yet look at inflation, it’s near to nothing. So, this is the school of thought in modern economics, so much of printing is happening, but there is no inflation

Sri Lanka is getting ready to follow this. We also have the capacity because, if you see, our liquidity injection as a percentage of GDP, is only 3.5%. Whereas other economies like Japan are at 23%. Of course, we don’t have the same economic fundamentals, but we can go much higher. I don’t think the government is worried about inflation. This is my perspective.

Dilshan, you were reminding us about 2008. That wasn’t so long ago. Inflation went to 25% then. A factor about modern monetary theory that people highlight is the disconnect it has with the large foreign debt Sri Lanka must pay. What are your thoughts on that?

Dilshan: I don’t think we’ll go there. The foreign debt repayment is a big problem. But I think the government will try to sort that out through bilateral loans. They will go to friendly countries and obtain currency swaps, to address foreign debt repayments in the next two years. There are several large foreign currency loan repayments in 2021 and 2022, and I would expect the government to manage that with bilateral arrangements. If those fail we will probably go seeking IMF assistance.

Just one thing on the inflation. We all agree rates are going to go up and inflation is going to go up. But I don’t see that being demand-driven. So just because there’s cash out there, I don’t think people are consuming.

On the supply side, a potential depreciation of the currency is possible as our reserves position is vulnerable. And we’ve seen in the past when we have a big depreciation, we’ve favoured that to gradual depreciation in the past, you may see that’ll drive the supply side and push the cost curve that drives inflation.

Modern monetary theory works in countries with a strong currency and reserve position. Don’t you think the approach is contradictory in Sri Lanka?

Kanishka: : So the question about modern monetary theory. Let’s call it what it is, we’re talking about money printing. And the key question is how much money printing is sustainable. When there is slack in the economy, like there is now, there is space to print money, provide stimulus without it becoming disastrously inflationary.

Similarly, you’ve seen in Japan, there’s not been much economic slack. So the money needs to go somewhere in the system. Sometimes asset prices can be one outlet for that money, which doesn’t then lead to demand-driven inflation. That’s what we have seen in the United States as well, not only in equity but also in fixed income.

In Sri Lanka, there is certainly slack in the economy. On the output side, there is probably space for asset prices to increase. Even in the stock exchange, the valuations are extremely low. So there is some space for money printing, and there is some space for elements of modern monetary theory. I think the key question is, to what extent? And for how long? How sharp? How much of a deficit, can you sustainably have? And then how long can you sustain it?

Niloo: MMT is a tool. So long as our percentage of the stimulus relative to the stronger economies is lower, I think it’s sustainable. So conventional economists are being thrown out of the window. Money printing those days was a bad word. Now it’s becoming a part of the new norm.

Kanishka: I don’t know why people keep saying you need to have a strong reserve position to print money and getaway. I am not sure because one is internal. You are talking about the domestic economy when you’re talking about money printing. Reserves are related to the external sector. To me that they’re separate things.

Niloo: Even though we don’t have reserves, you can continue to print money. I think a factor to consider here is the possibility that we will have to use the reserves we have. We are already doing this to defend the currency. And then we also need to use the reserve to repay debt. When the reserves are depleted then your choices become limited.

Dilshan: If you take the whole year of 2020, the Central Bank is still a net buyer of dollars in the market. It’s been selling dollars only recently (in late 2020).

Kanishka: Trying to defend a certain psychological exchange rate is suicide because you burn through your reserves. And, as Dilshan says, that’s not what the Central Bank has been doing.

What do you anticipate will happen to the exchange rate? Say a year from now, where will it be?

Dilshan: At the beginning of this year, we forecasted 186 to 191 as a range. And I think we will see, it’s currently at about 188, I believe, the spot rate, I think it will probably close somewhere about maybe even slightly appreciate to get it to the number. I believe 185 is the like number, whether we will get 185. And I mean, you can achieve it in a matter of a couple of days by saving a few dollars in the market, because our market is so thin. But for next year, we see touching 200. So 200 to 205 is our range for the currency for end 2021

Niloo: We will see it around Rs197 to the dollar or about 6 to 8% depreciation in 2021. Something to note is that every three years we have a huge depreciation. In 2012, we had a 12% depreciation, then in 2015 it was 9.9%, and in 2018, we had 16% depreciation. So 2021, is that three-year mark.

This environment is a difficult one in which to allocate assets. What are the options?

Dilshan: In Sri Lanka, there are three asset classes an ordinary person can invest; fixed income, equity, and real estate, very broadly speaking. But I would be bullish on equity and real estate, and less so on about fixed income purely because rates are low. On fixed income, we are looking at negative real returns.

Now the government has issued guidelines to banks for housing loans at 7% fixed for five years and APR (average prime rate) plus 1.5% thereafter. So I know, a lot of people are looking at borrowing to get that 7% yield and then go invest in real estate. So real estate will probably outperform fixed income.

Our forecast for equity is that the All Share Price Index (ASPI) for the 2021 year-end is 7500 points. From where we are now that’s about a 12% return on the index (forecasted in December 2020).

On real estate, we forecast 10% returns on average, although price changes can vary widely from one postcode to another. So I would be heavy on equity and real estate. So probably by end 2021, it would be good to be looking at fixed income.

Nobody’s looking at fixed income anymore. And if you anticipate inflation, then staying liquid, that is staying in cash isn’t a good idea either. Does that narrow the choices for investors?

Niloo: The trailing 12-month earnings, for the September quarter 2020, is a 14 times multiple. The multiple will rise in the December quarter because the pandemic’s second wave will hit earnings. However, in 2021, the market earnings multiple will fall to about 12.5 times. Market earnings growth will be a minimum of 30% in 2021. Of course, we are coming from a lower base. Therefore 30% earnings growth isn’t so attractive. But equity investing is forward-thinking, you’re buying into future earnings of companies. So this asset class generally should be a better investment than even real estate. In real estate, it will take some time for value to set in.

Kanishka: Protecting against the downside risk from inflation is critical. Take exposure to real assets. Equity is a real asset because you’re buying a real business. Real estate is also a real asset. And it’s also worth remembering that inflation is equity positive. If you run a business and there is 10% inflation, if you do nothing hopefully your business should generate 10% more profits. That’s something to bear in mind.

And I think it’s important not to get carried away by the PER because the ‘E’ (earnings) is really below potential. I am a firm believer in the profit potential in business. We can estimate the profit potential of a business, which is the amount it will make under normal circumstances. If it’s depressed below that level somehow due to some extenuating circumstance, like a pandemic, that snap back to normal happens much faster. You’ll see very high earnings growth in a lot of businesses. And then suddenly, you will see that multiples shift very dramatically.

So let me ask you about your forecasts for 2021 earnings growth? And to put some context we’ve had two years of declining earnings.

Kanishka: : For things like earnings, we focus on micro, and not marketwide. So let me talk about sectors. I expect the financial sector to see some earnings growth. I know there’s potential headwind from the non-performing loans coming. But there’s going to be a combination of window dressing, in terms of the government allowing banks to not recognise NPLs, and second inflation itself is NPL positive.

The government won’t have the capacity to unwind the stimulus in 2021 with the budget deficit almost at 10%. Globally, quantitative easing or printing money is the strategy everyone is following.

We need to be aware that inflation has many impacts. But one of the impacts of inflation is that one year down the line and your ability to repay that loan becomes a little easier. There is a huge upside on tourism, not in 2021, but early 2022. But at least you know, some of that negative part will go away. Consumption we see continuing to do reasonably well too especially in the first half. In the second half of the year, we might see headwinds, but overall we are seeing growth in a lot of businesses.

Is it possible to quantify stuff?

Dilshan: We are probably over with the negative earnings trend we had during the last two years. But the fourth quarter 2020 calendar year earnings may be negative due to the second lockdown. But thereafter I think earnings will grow. If you compare with regional markets, our price to book ratio is attractive. We are still trading at a price to book ratio of one. If you look at other markets, they are trading at around 1.7 to 1.8 times price to book ratios.

In terms of multiples, there is room for valuations to rise without earnings increasing. That’s number one. Number two is I think we’re talking of fundamentals here, but we shouldn’t forget sentiment. A lot of our stock market is driven by sentiment. But I wouldn’t write off the fact that the market could go from the current PE multiple to maybe even 20 times. Thereafter it may come back down again. So I think sentiment is a very important factor.

Just to give you some context. I sit on the board of the Colombo Stock Exchange, we’ve launched an app that allows you to open a CDS account and start trading online. We’ve had about 7,000 accounts being opened online since we launched it in November 2020. So there’s a lot of interest.

That content has to be appreciated. We have only about 200,000 CDS accounts in this country and around 70,000 active traders, that is at least one trade done in the year. So we only had 70,000 people. If you consider this context we opened 7,000 new accounts, and most of these people were young, in their 20s and 30s. So, I think, there’s vast potential for new investors to enter the market and that will drive sentiment and drive valuations may be even higher than what they should be.

Over time, you can’t avoid fundamentals. But I’m just giving a Sri Lankan perspective. If you look at trends, a lot of times the market boomed was not driven by fundamentals shifting, and people saying, wow, companies are earning more money. There is a lot of herd instinct.

Our market is up 9% year to date, so far (early December 2020). We’ve had a 40% appreciation since May 2020. If someone looks at the equity portfolio bought at that time, there is a huge gain. So a lot of new clients are focusing on that. Sentiment is a part of markets. It’s not a bad thing.

What is the CSE app called?

Dilshan: It’s called the CSE mobile app. You can download from Google Play Store or the Apple App Store

And you can trade through the app, or do you need a brokerage account connected to it?

Dilshan: You can open the CDS account digitally, so there is no paperwork required. You essentially take a selfie, fill the forms and submit it through the app. You need to select a broker because you cannot trade without a broking account. So there is a drop-down menu and you can select your broker.

Niloo, do you think it’s more sentiment than fundamental right now?

Niloo: What’s good is that all the fundamental factors for a buoyant market are in place, like, low interest rates. Right now the prime lending rate is less than 6%.

This time around it is the retail investors who are buying in the market, unlike other times when global funds were also investing in the CSE.

When there is some incident these global funds move their money, but this time, because it’s driven by local capital it’s sustainable. The daily turnover is averaging Rs2 billion, which is incredible. We haven’t seen these kinds of volumes in the past. Low interest lower interest rates have a lot to do with it.

Do you anticipate foreigners will come into this market anytime soon? Consider the outlook on the external front, you know, how our ISBs are trading currently. Will these have a bearing on for eigners coming into the market?

Kanishka: One of the things I’m keeping in mind is that starting in March 2020, the US started printing money like never before and handing it out. The average American worker got paid more being unemployed, then then they had a job. All that was printed money. Now that money is working its way into the global system. And that money needs a home.

All these global pension funds have target yields they need to hit, and you’re not going to hit that yield investing in US Treasuries earning 0.5% interest. So they are looking for, and it will be a matter of time before that cash starts finding its way into frontier markets. Now, what’s holding all this? You know, everybody went into risk-off mode. It’s going to be breathtaking, how fast they move back into risk mode.

Global fund flows are already going into emerging markets. With all the negative news about Sri Lanka, we haven’t seen any of that inflow coming here. But as a Sri Lankan investor, you need to keep an eye on the catalysts that would make a foreign fund manager want to move money back here. That catalyst can be an IMF programme in the second half of 2021. You know, just because we said no to the IMF now doesn’t mean that we’re never going to be ever interested in them in the future. So I do think global money flows can start coming back to Sri Lanka. I think that demand is there. I don’t see it in the next six months, but in the second half of next year, it’s possible.

Dilshan will some of the global money flows shift to Sri Lanka soon?  

Dilshan: I don’t think it will happen soon, but eventually it will. I think the current uncertainties around, our debt repayment, and macro issues are probably keeping them away. But as Kanishka says, it’s a matter of time.

I think an IMF programme would be a catalyst for foreigners to move back in. The Central Bank, for the first time, is offering a currency swap to shield foreign investors into rupee bonds from exchange rate risks. For most foreign investors the concern has always been the exchange rate.

It’s not so much the outlook on the share or the earnings, it’s always when I convert it back how will I lose on the exchange rate. That has been fundamental for most foreigners, to pull out from equity and the bond market. The government is giving, guaranteed exchange rate, the same exchange rate at which dollars are brought in to exit in two years. I think it’s a matter of time, say towards the second half of 2021 when foreigners start investing here again.

Do you anticipate mergers and acquisitions in the financial sector in 2021? It looks like there is a divergence of fortunes between banks in general and some of the finance companies.

Dilshan: I don’t think we will see it in the banking sector. Banks have never been able to agree on a merger, I can’t see it happening this year. Bank shareholding is pretty fragmented so it’s challenging. And for a merger it has to make economic sense, so with the bigger banks, their branch networks overlap. So I don’t know whether you can achieve cost efficiencies through a merger. And I know most banks would just probably like to stay where they are today.

But in the NBFI sector (finance companies), I don’t think there is a choice in the matter. If you consider the look at the 40 odd institutions, we have the top 15 which are fine. But many in the bottom 20 don’t comply with the capital adequacy requirements, the Central Bank has introduced. So I think it’s a matter of time before there has to be consolidation. I feel we have too many NBFIS in the country.

We’ve had a wide-ranging discussion. Any final thoughts?

Niloo: I believe the economy will spring back. The risk is of course the pandemic, and it depends on how well the government will manage it. In Parliament, there is a stronger setting to set policy. So if policy consistency comes, this economy will do better. I feel the government’s strong mandate has been hurt by the pandemic.

My office overlooks the port city. Every day I see development happening. It’s unbelievable what’s taking place here. So, some of us are blind to it. And so being positive is the way to go.

If we go to the IMF a lot of global fund managers will start looking at Sri Lanka in a better light, so it would be a good thing. However, we must realize the IMF will demand structural reforms, which is not possible. So, delaying going to the fund is a good thing. It will give us time to grow the balance sheet to some extent, and then go for the final bailout.

Kanishka: Fiscal stimulus, I think is the right policy for our economy. Yes, there’s a fair bit of money printing and that’s going to cause some inflation, but you have to pick between the worst of evils now. From a policy standpoint, you can always argue on the small points, but directionally I think, we are making the best of a difficult situation.

If I were to leave concluding remarks, since I’m a fund manager let me stick to what I think I know a bit about. Now it’s time to prepare for inflation and diversification is always necessary for a portfolio. Consider the downside risks and the erosion that can come from inflation. We’ve had a five to eight-year period, where it’s been an amazing run on fixed income and that can change. That’s also a big shift for the industry because most of our assets are in fixed income. And that’s a mindset shift that a lot of you will need to make in 2021, we need to get a little more creative.

I had a client some months ago who told me, ‘If I can earn 14% on a fixed deposit why the hell should I run a business or do anything else for that matter.’ So investing will become less simple than that, you need to be a little more creative. The good news is there are alternatives and asset classes.

Now we have legislation approved last year for Real Estate Investment Trusts (REITs). I do expect that as an asset class it will be available in the second half of 2021.

I think there’s a certain amount of positivity, as we are looking up from the bottom. And one of the most enlightening things I read, May 2020 when all was doom and gloom in a presentation was, someone said ‘don’t underestimate the speed with which people will move back into risk when the path seems clear.’ And I think that’s already evidenced globally

Dilshan: I think we’ll probably be pushed to the IMF probably in 2022. Like I said earlier, the government would look at bilateral arrangements to tie up the problems we have immediately

One thing we need to remember, as a nation, is that we’ve been one of the most resilient countries. Don’t forget we’ve been through a war, April 2020 bombings, political turmoil, and now the pandemic. So I’m very bullish about the recovery in 2021

Fiscal stimulus is the right policy for our economy. Yes, there’s a fair bit of money printing and that’s going to cause some inflation, but you have to pick between the worst of evils now.

Like the other panellists, my favoured asset class would-be equity. But as Kanishka mentioned, the other alternative asset classes will become accessible through the CSE. I can tell you, there will also be commodity-based products that will be introduced like gold, and stuff like that is coming to the CSE in addition to REITs. So investors will have access to a more diverse range of products. So that itself is exciting for us as fund managers, we will have more options.

Overall, being positive is a big thing. I think that that attitude itself will help a lot. And we’ve all agreed that it is a recovery, though, we have some concerns on interest rates, inflation, and stuff like that. So I think we are heading for good times in the next couple of years from a capital markets perspective. As fund managers, it’s an exciting time to be involved in this business.