“Invest SL” Forums in Australia Speech by Mr. VajiraKulatilaka Chairman of the CSE
I will start with two photographs, the first being what I used to use for presentations three years ago and another which shows a current picture of the activities that are happening now – (The photographs of the Galle Face area skyline then and now). The country is going through a transition. In the earlier phase of development, the government engaged in spending, consumption took over and the country went through problems as a result. In two or three years this process led to a balance of payment problem and complications surrounding the exchange rate which eventually led to development being halted. The present government is in the process of changing this strategy to one that ismore private sector and export driven. As a result of this transition, the country is presently going through slower growth, unlike 7-8 percent that we used to see, but I think this phase of transition is extremely important for sustained growth in the country. Our growth figures at present are still better than most of the countries and I believe that with the changes that are happening and the transition taking over, more sustainable and faster growth will be experienced going forward. In the perspective of inflation, we have seen a marginal rise but it is under control because most of the corrective measures and controls that are put in by the government will mean that inflation is likely to come down again.
Moving on from macro to give you a snapshot of the Colombo equity market, we have 295 listed companies, a market capitalization of 18 Billion US Dollars and 20 Industrial Groups based on the MSCI and S&P Global Industry Classification Standard (GICS). We have adopted GICS because it is a globally recognized benchmark for classifying industry and sector groups, which assists both investors and other capital market stakeholders.
If you take the equity side, the country’s equity has given a return which is far in excess of other countries. From 2009, equity investment has given high growth and returns in Sri Lanka. When compared with the likes ofPhilippines, Bombay, and Thailand, Sri Lanka has again given a better return. Another important aspect as to why equity remains an attractive investment for foreign investors is that the valuations are very low. We talked about the country going through a transition, economic stability, the rise in property development and now couple such factors with low valuations. All these indicated how attractive the country is as an investment destination. The country is about to take off, the valuations are low and now is the time to make investments in equity.
Similarly if you take growth, the country has reported quite a high growth in corporate profitability at 18.94% which is quite attractive. We have only had two years of foreign investment outflows in the CSE, in other words most of the time foreigners have invested in the country with a net inflow.
Again, as much as the country is going through a transition, the capital market or the stock market is also going through a transition.When the conflict in Sri Lanka ended in 2009, we at the CSE were of the belief that it is time develop a strategic plan and try to implement it because we knew that we would have to play a significant role in the development of the economy. So as a result the strategic plan is now being implemented, including engaging in market development with an eye on promoting the stock exchange like we are doing today, on the other side we are working on improving the number of issuers in the market, including state owned enterprises. We are also working on improving the liquidity of the market by promoting it to foreign institutional investors and we intend to introduce a SME board, which would feature up and coming growth stocks. The Multi-currency board, which is also set to be introduced, is an important step in our bid to develop into a regional stock exchange, where we would facilitatethe listing and trading of dollar denominated securities. What we are expecting out of this is for regional companies to list in the CSE and there are very good prospects for the same. We are expecting at least one listing of a Maldivian Company in Sri Lanka this year.
We are also working on diversifying our product range and are in the design stage for both Real Estate Investment Trusts(REITs) and ExchangeTraded Funds.Such initiatives are being introduced to the Sri Lankan capital marketto give investors the choice of a diversified portfolio.
A lot was said about property development today but we have to get a paper market for property market gains because not everybody would like to hold physical property. It is in that regard that we are in the process of introducing REITs, which will facilitate paper investments in the property market.
In the perspective of governance, we are in the process of demutualizing the stock exchange and introducing proper guidelines for directors.
We are also in the process of making several upgrades in terms of infrastructure to technologically back the many growth initiatives we are pursuing. 30 years of war certainly had a backward effect on the CSE. In the early 90s we were far ahead of our regional peers, but now we know that we have to leapfrog the rest and we are engaging in growth initiatives with the objective of bringing the market up to world class standards. The stockbroker back-office systems have now been modernized, and upgrades have been made to the Automated Trading System, the surveillance system and the CDS.Information security improvements and the introduction of GICS, as I told you earlier have also been introduced.We are also trying to build the institutions around the capital market in the brokering side, in terms of research and information dissemination.
Moving on to the important matter of risk management, we are in the process of introducing a CCP, which will leapfrog us to one of the top exchanges in the region as most of the stock exchanges in the region do not have a CCP. In terms of improved market regulation, the new SEC act, will bring international best practices into the capital market. We have also introduced an enhanced disclosure framework and new investor grievance handing process. All of these initiatives are introduced with the objective of facilitating information dissemination and to make regulation more stringent in order to create a level playing field for everybody.
We are also strongly focused on the sustainability side, with the CSE joining the UN’s Sustainable Stock Exchanges initiative along with other stock exchanges where we collectively introduce sustainable processes into listed companies, especially in terms of reporting.
Equity is the highest growth sector in the Sri Lankan capital market but another investment that you could make is in the form of corporate debt. Corporate debt in Sri Lanka underwent a transformation of its own in 2013, where value of issued instruments increased drastically from around 12 Billion to 68 and ultimately it went up to 83 Billion worth corporate bonds issued in the market. We are also working on creating a better environment for the trading of these debt securities to boost the secondary market.
Moving on to take a look at trading possibilities in government bonds, we have taken three possible trading alternatives to offer you perspective on likely returns.The first being to have purchased a one year treasury bill and to roll it over for a period of five years. Doing so would have offered you a much better return than alternatives available in Australia and New Zealand and other countries because Sri Lankan rupee investments have earned much more than what you would expect in other markets.
Similarly, there is only one index available and if you have used that index to invest, you could earn quite a high return, especially in Australian dollars compared to any other index available here.
Another option you could look at is investing in a five year bond. Just to give you some perspective, had you done so five years ago, you would have received a high return in AUD as much as 12.5%. You therefore have the possibility of earning quite an attractive return should you come to Sri Lanka and invest in government bonds. Corporate bonds also would offer higher returns considering the risk adjustments on the returns.
Having looked at equity and debt, investors do also have the option of investing in mutual funds or unit trusts. The Unit Trust industry has also grown significantly during the last four years. Depending on the risk-return profile, you could invest in different funds that are available in the market. We have funds that invest in government bonds and corporate bonds, equity and fixed income, balanced funds and growth funds, which are very much focused towards the equity side. We are also to introduce specialized funds such as REITs which would be available in the near future. These funds offer portfolio managers the opportunity to get into different asset allocations using combinations.
In terms of how to invest in the products and markets I just outlined for you, in general terms, if you bring in money through the right channels, you could also take it back with ease, which I know is an important fact considered by international investors. In the matter of Unit Trusts discussed moments ago, international investors have the ability to come directly to the Unit Trust without coming through a Securities Investment Account (SIA), which is a key feature that simplifies the process to a large extent.
If foreign investors are interested in having a portfolio of investments beyond just Unit Trusts, such investors would have to come through an SIA account, which would allow you to access government securities, corporate equity and debt. This process also facilitates easily taking funds back to the country of origin.
We spoke about many things including the fact that Sri Lanka is in a period of transition. We have changed our model of growth to take on a more sustainable approach, we have put in place a number of controls to ensure good governance and as you saw today, we have taken a number of development measures with the objective of attracting foreign investment and more importantly we have taken measures to ensure peace. Very few countries today could say that they have peace, especially in frontier market countries. Overall I believe that the country is at a turning point and in that respect, attractive valuations and the possibility of earning high returns make now the right time to invest in Sri Lanka.
