Investor confidence vital for attracting FDIs

The slow and inadequate foreign investment inflows into the country are a concern as FDI is vital to sustain a high trajectory of economic growth. Much foreign investment was expected after the end of the war in May 2009. Why have there not been substantial inflows of foreign investment in the post-conflict period? The answer is not difficult to find.

The uncertain policy environment, the law and order situation, lack of reforms in labour legislation, macro-economic instability and corruption are among the reasons attributed for the slow inflow of foreign direct investment, especially the type of desired investments in export industry and services.

ADB assessment

The recent Asian Development Report Outlook for Asia makes some pertinent observations that: "Investor confidence is a key factor in attracting investment and this requires a predictable policy environment as articulated and reinforced through the legal, regulatory, and institutional framework."It points out that "the lack of such an environment for the private sector is a major obstacle to private sector development."

Further, the report says that although the government was keen to obtain foreign investment "the government has taken only a few steps to reduce red tape and improve the business climate, needed to create the conditions for ramping up private investment." One of the specific deterrents to investment cited was that "the government expropriated businesses last year and thereby violated property rights of both citizens and non- citizens that had a negative effect in investment."

The need for foreign investment

The high trajectory of growth that is planned cannot be realised unless the amount of foreign investment increases substantially. This is particularly so as domestic savings are declining and the investment-savings gap is widening. The recent high-powered mission to South Korea is an indication of the government's interest in securing foreign direct investment. However, such missions are not likely to achieve much unless the ground situation is made more conducive for foreign investment.

Foreign investment is a significant driver of economic development. It fills the savings-investment gap by supplementing domestic savings with foreign savings and enhances the capacity for economic growth. While the quantum of foreign investment is important in determining economic growth, the nature and type of such foreign investment determines the long-term development of the country. Foreign investment in export industry is especially valuable in strengthening the external finances of the country. FDI contributes to improving work ethics, discipline, skills and knowledge of workers and productivity. It is an important means of technology transfer, transmission of management best practices and accessing new international markets.

International experiences

It is the realisation of these economic benefits that has made many countries both developing and developed to aggressively seek for investment. Former communist countries like China and Vietnam, and the formerly inward looking Indian economy, have sought and obtained large amounts of foreign investment. China is the world's second largest recipient of foreign investment.

It may surprise most readers that the United States is the world's largest recipient of FDI. In 2010, the U.S. received $194 billion of foreign investment, 84 percent of which came from or through eight countries: Switzerland, Britain, Japan, France, Germany, Luxembourg, the Netherlands, and Canada. FDI has resulted in 30 per cent of jobs for Americans in the manufacturing sector. In China foreign investment has increased considerably in the last decade reaching $185 billion in 2010. Foreign direct investment in India estimated at $44.8 billion in 2010 increased by 25 percent to $50.8 billion in 2011.

Factors Deterring Foreign Investment

Foreign investment is influenced by political and economic stability and an overall assessment of political and economic conditions. Tax and other incentives, labour regulations, work ethics, social and economic infrastructure, costs of production, potential domestic market have an important role in foreign investor decision making. Some investments are deterred by perceptions of corruption; others accept such costs as worthwhile incurring for favours granted. For one or more of these reasons, the international investment community does not appear to consider Sri Lanka a favourable destination for investment.

The political situation in Sri Lanka is stable only in the sense that the President and government are secure to rule for another five year period. However, international assessments consider other features in the polity as destabilising. The continuous protests and violence; religious intolerance and violence such as witnessed recently in Anuradhapura and Dambulla; issues in press freedom and disappearances of people regularly that are highlighted around the world; and murders of tourists are deterrents to foreign investors coming to the country. Investors are concerned about these security concerns as much as the safety of, and return to, investment. Perception of corruption could also deter prospective investors. It is therefore crucial that any such perception is wiped out.

Economic stability and macro-economic fundamentals are also investor considerations. The instability of the exchange rate, the large deficit in the balance of payments, large foreign borrowing, the net reserve position, fiscal deficit and rate of inflation are among important economic criteria that investors look at when determining the countries they invest in. Although the country has achieved high growth rates these other considerations matter much to investors.

Government policies

There is still a degree of uncertainty regarding government policies on foreign private investment. The experience of privatised ventures being re-nationalised such as Shell and Sri Lankan Airlines are not conducive to developing confidence among foreign investors. While inflation has been kept at single digit levels, there are fears that it may rise again owing to weaknesses in economic fundamentals.

Costs of production play an important role in determination of investment locations. Several production costs too are high. This is especially so with respect to high energy costs. Sri Lanka is no longer a cheap labour country: labour is cheaper in Vietnam and Bangladesh. Labour regulations in the country also affect investment. Investors find the lack of freedom to hire and fire in Sri Lanka a disincentive as labour regulations that do not permit labour discontinuance increases investor risks.

Conclusion

The inflow of foreign investment to Sri Lanka is low when compared to other countries. The current level of FDI is quite inadequate to raise the country's economic growth to a higher trajectory. The uncertain policy environment, the law and order situation, lack of reforms in labour legislation, macroeconomic stability and corruption are among the reasons attributed for inadequate foreign investment inflows. Investor confidence that is a key factor in attracting investment requires a predictable policy environment to attract much larger amounts of foreign investments in the types that would boost long term economic growth.

By Nimal Sanderatne

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Diversification – Is it the way forward?

Compared to the late 1970s era of the economy when big companies slowly began diversifying but essentially connected to core operations, today it has changed completely. Now new conglomerates are reaching all over irrespective whether there is expertise in th company or not and becoming ‘seemingly’ successful.

But the moot point is – by delving into hitherto in-experienced business lines, are companies – particularly those listed putting their shareholders at risk because the risk is greater in such acquisitions and a longer return on investment or, are they?

Forced to diversify
According to Deshan Pushparajah, Head of Corporate Finance Capital Alliance, conglomerates have historically been significant in Sri Lanka and in frontier markets in general for two specific reasons. One is because frontier market companies generally wouldn't have scale in operations in one business area, hence they diversified into many and some examples are Aitken Spence and John Keells Holdings. "Tourism or plantations weren't big enough on their own. Without being big enough they couldn't make best use of their expertise. Banks wouldn't lend as much to them, etc which is why they were forced to diversify,” he explained.

Conglomerates: Then and now
In the late 1970s when Sri Lanka’s closed economy opened out to the world big companies like John Keells Holdings and Aitken Spence Holdings, etc whose core business were tea and other trades slowly began diversifying into other areas. But the new businesses too were essentially connected to core operations.
Today, some 35 years later, it has changed completely with many firms putting their monies – and some of it publicly raised – into totally, unrelated new businesses. Diversification can put you on the fast track to growth but if the strategy fails it can also burn up your money.

History tells us that it’s not advisable to consider diversification until your core business is steady, stable and secure and profitable. If you’re still struggling to win orders and build a sales time for the core product, there is a real danger that diversification will take your eye of the ball.

There is a range of new and earlier established businesses like LOLC, Laugfs, Raigam, Softlogic, Vallibel, etc whose investments range from financial services, insurance, consumer products, real estate, food, banking, etc. Then there are the old established firms like CIC or Cargills that have newly expanded into core sector-related businesses.

The Business Times spoke to some entrepreneurs, analysts, academics and top CEOs to set straight this record.

The second reason Mr. Pushparajah noted was that there is very little venture capital available in Sri Lanka. “And banks are not willing to lend much to start ups either. Because conglomerates have large balance sheets, they could borrow/ source equity much faster and cheaper for start up ventures,” he noted, adding that some years ago only conglomerates could support fledgling businesses in frontier markets such as Sri Lanka.

However, he also noted that things are changing fast in Sri Lanka. “With operations scaling up, I think in four to five years you are going to see a fast de-conglomerizing (dropping non-core units) of companies. Whilst even in today's context conglomerates make sense, it won't in a few years. Most frontier markets (South Africa is a case in point) have gone through this phase,” he explained. According to him, once competition arrives in core business areas for these groups and volume and scale becomes demanding, they will start shedding non-core business areas.

Sattar Kassim, Director Expolanka Group said that diversifying is more to do with economies of scale. “For example just by building one hotel the economies of scale won’t be achieved. The real scale will come only by managing hotels and increasing the room capacity," he said.

He added that today is a specialist world where in the long run haphazard diversification won’t be a sustainable model.” One day they’ll be forced to scale down and divest the particular business or really go up the ladder and get proper economies of scale,” he added. Mr. Pushparajah noted that early conglomerates have subscribed to this thought and have slowly started shedding non-core businesses.

A business analyst noted that one can diversify his/ her business by natural progression. For instance, if you sell men’s shirts, adding ties and cufflinks to the range are an obvious next step. More radically, you extend the brand by offering a much wider range of products that will nonetheless appeal to the same customers. Alternatively, you can use the strength of a brand to move into new markets.
According to a researcher on capital markets, stock prices track productivity of firms and this tracking is equally strong for diversified and stand-alone firms.

Conglomerates don’t add value
He also highlighted that on a long term basis, conglomerates don't add much value to shareholders and in most instances they tend to destroy value. He added that this is especially so when firms diversify into business areas totally foreign to their own.“It is true that expertise can be bought, so can businesses and track records, but they will (a) come at a steep price and (b) would take on capital which could have been more effectively used by reinvesting in one's own core business,” he stressed.

What isn’t a moot point is that while expertise could be there, focus may not. This is why Mr. Pushparajah noted that shareholders stand a great chance of losing value when a firm diversifies without focus. The new age conglomerates, he added seem to be building empires instead of adding value to shareholders.

As far as risk goes - there is risk added on two fronts. The first is in terms of business risk. As much needed capital for core operations could be identified for a non-related venture, Mr. Pushparajah stressed that this is also putting the company at risk of competition and falling behind.
Second, most of the new age conglomerates are leveraged buyers. “Huge amounts of leverage could enhance return for shareholders, but also put shareholders at much greater risk. Hence the risk premium attached to the business should be much more. This is what rating agencies are warning against,” he highlighted.

On the longer term, he added that markets and investors would rationalize towards shareholders diversification viz a viz conglomerates. “This is always a much better way of diversifying risks and returns.”

Tea brokers like John Keells have diversified into other businesses.
The chairman of a heavily diversified firm, who declined to be named, stressed that a businessman in a diversification attempt has to look at what the growth sectors of the economy are during both medium and long term and align them to the growth sectors of the country.

“During this medium and long term cash flows of those growth sectors and their capital gains need to be considered. Cash flows in the short term can be mediocre, but capital gains can be exceptional and vice versa. After aligning the identified business to the country’s growth sector, one must examine whether the company possesses the internal competencies to venture into the particular business. "This follows an acquisition of a related business or starting afresh,” he explained.

Selective diversification
Nirmali Samaratunga, Co-Chairman Mackwoods Ltd noted that from Mackwoods’ experience diversification has been sustainable. "In the case of Mackwoods, with our long business experience we have, over the years strategically followed a business approach of continuously developing our core business areas whilst selectively diversifying into new businesses which primarily relate to our core domain and expertise," she explained.

She noted that this has enabled Mackwoods to create value and selectively spread the business risk whilst harnessing both institutional memory and also maintaining lean overhead costs, whilst leveraging on the broad existing knowledge base.

“This is exemplified by our theme 'tradition with vision'. This model has proved to be strong and sustainable and has worked for us,” she stressed.
In the case of new businesses’ diversification, Ms. Samaratunga noted that there's no definite 'yes' or "no' answer regarding the ability to succeed and whether this is a sustainable business model. “I feel it is subjective, dependant largely on that individual company or group's ability to undertake such diversification into unrelated lines, to ensure long term success and sustainability.

Whilst long years in the business and the accompanying reputation, trust, resilience and synergies with the existing businesses, certainly is an advantage and is an index of sustainability, still if the new business was to approach diversification in an informed manner and with an objective approach and taking a long term view of the sector it is entering, then there is no reason why they should not succeed. Many new companies have shown their ability to strongly succeed through such diversification, as is evident if one looks around.

I would (also) say the risk is not greater nor the return on investment less, provided the right approach and required conditions for success are in place and diversification is aimed at creation of value and the long term sustainability of the business. It's spreading one’s risks. We are into selective diversification into other areas. We were leveraging on our existing strengths," she explained, adding that Mackwoods always went for selective diversification in areas where they saw definite potential.

Winning strategy
Diversification, according to Dr. Ravi Liyanage, Chairman Raigam Group which has diversified during the past two years considerably said that it is a winning strategy. "It'll work if is implemented meaningfully, but not as a herd instinct or because it's the ‘in thing’.

As an academic and also as a CEO using public funds, my recommendation and also my practice in diversification decisions necessarily follow a mix of theoretical and practical formulae,” he said, explaining that fundamental in a diversification formula is the products or business units which have to be analyzed in terms of their position in the product life cycle (introduction, growth, maturity, decline) and market share plus growth momentum (BCG analysis; stars, cash cows, dogs, question marks).

With this analysis, how to go about the diversification process could be theoretically figured out. “For an example while retaining cash cows its excess cash generation could be considered for diversification, due to the fact that further investment in cash cow industry (cash inflows) is pointless as its growth potential is low,” he explained.

He also noted that when considering related diversification, that cash could be invested in good ventures which will be next cash cows. But Dr. Liyanage agreed that there are instances in the Sri Lankan context, where large businesses / conglomerates suddenly collapse due to ignoring fundamentals in diversification. “Especially once companies raise funds from the public, those are used in a wild way or as a passion for new investments / industries where management is not knowledgeable about the basic fundamentals of those businesses. They do trial and error while losing focus or sacrificing their core businesses. These new investments are ‘question marks’, it is really questionable whether it will work or not,” he explained.

Copy cats
He stressed that diversification as a 'copying others' strategy is a business model deserved for short-sight business people. “Any businessman who value sustainability of his business will never go in for such a wrong-diversification model," he added.

Prof. Uditha Liyanage, Director Postgraduate Institute of Management, noted that diversification is a matter of becoming opportunistic or sticking to one's core business. While noting that all entrepreneurs have great growth expectations, he said that the emotional factor of becoming 'big' plays an even bigger role in their diversification attempts. "With a single business, their growth potential is limited. Sri Lanka is a small country and for many businesses, the markets are small. So a single business doesn’t give those adequate numbers. In their core business the projected numbers are small, which is why they go into non-core areas.”

Prof. Liyanage noted that non-core areas come with two facets -opportunity for growth and the capability. “There should be a good fit of both these facets. What could typically happen is that they may see growth, but they won’t ask whether they possess the requisite competencies and capabilities,” he said. For instance, he noted that the tourism sector is a growth sector, but no one asks where exactly the growth is.

“One cannot work on a generalization that tourism is a growth sector,” he added, saying that getting into any sector shouldn’t be a knee-jerk reaction as invariably those businesses won’t sustain or they’ll be spreading themselves thin.

He added that when identifying an opportunity a company has to back it by getting in the relevant competencies. There’re also emotional reasons because being big is a good feeling. "The society expects them to grow their businesses and create jobs. If this sentiment overrides, it becomes dangerous. It’s important to separate each business unit and make them accountable for each of their businesses," Prof. Liyanage said.

Organic growth is painful
Nishan Sumanadeera, CEO Frontier Capital Partners noted that in business, growth can be achieved in many different ways and that organic and inorganic growth is considered two of the key methods.

"Organic growth is painful and time consuming process which requires considerable amount of time and effort. This is what most companies in the early 70's were engaged in, starting new business that compliment with their core business and tirelessly building bridges between businesses. But today’s business managers have a more dynamic and fast way to growth or conglomeration. This is via mergers and acquisition of well run businesses through capital market activities,” he explained.

Although this method can be considered as an easy way to the top, today’s business managers have the more challenging task of identifying businesses opportunities that may bring synergies with its existing business in a more complex macro economic environment, according to Mr. Sumanadeera.
“Currently we see, hospital owning companies acquiring insurance companies, financial conglomerates diversifying into hotels and media but common justification for most acquisitions are often been stated as the growth potential of the specific sector as against the corporate synergies.”

He added that sectoral diversification is good but it should come at the correct time. "Diversification should happen only after integration and consolidation of the exiting core businesses. It is difficult for a business to grow in the long run unless acquisition is planned in a way that would compliment the overall business position of the acquirer across all its businesses regardless of the sector.”

By Duruthu Edirimuni Chandrasekera
The Sunday Times

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Relief, renewal and growth in Sri Lanka

From the floor of the stock exchange to the former security checkpoints now plastered with advertising posters to the bustling energy of this South Asian capital’s streets, the signs of renewal are plain.

Sri Lanka’s economic recovery from its long and brutal civil war has been astonishingly fast, though perhaps not so swift as the sudden, blood-soaked final chapter of that 25-year-old conflict in early 2009.

Nor has it been so decisively concluded.

While GDP growth, estimated at north of 8% last year, is among the most robust in the world, and the stock market’s three-year return would make Warren Buffett’s eyes bug out, a rising debt load, widening trade imbalance and soaring fuel prices could endanger or even derail much of the recent progress.

Still, the once-feared Tamil Tigers, who at their peak ruled a third of the nation’s land area, are dead, dying or scattered. Massive sums are being plowed into new roads, bridges, port facilities and other infrastructure.

Tourism is booming, with arrivals up 31% last year. New construction is everywhere. Exports are up. Land long off-limits due to the war has been brought into agricultural production, keeping a check on some food prices. Inflation has largely been tamed.

And, even more than two years on, there is a palpable sense of relief and relaxation that the conflict is over.

‘A lot is happening here’
At a sawmill outside the city of Batticaloa on the east coast, the proprietor chats with visitors as his crew saw 200-year-old logs of satin wood into planks destined for the home of a Colombo gem merchant.

An ethnic Muslim caught in the crossfire between the majority Buddhist Sinhalese and the largely Hindu Tamils, he was driven from his home for more than a decade due to fighting between government forces and the insurgents.

He welcomes the reassertion of central control, he said, and, while he has the small businessman’s typical skepticism of government motives, he is enthusiastic about the improved roads and security situation, along with the opportunities they bring.

“A lot is happening here,” he said.

Stocks cool off after record returns
As international hoteliers flood in and foreign companies move to set up manufacturing ventures, still the easiest way for an outside investor to access the growth is probably via the local bourse.

It is also relatively painless. Foreign investors only need an account with a participant of the central depository system and, after some modest paperwork, can be up and running the same day, although the country’s securities and regulator has to approve any new foreign funds. The Department of Exchange Control only caps foreign holdings in plantation industries like tea and rubber.

From there, an investor can take the pick of listed firms in banking, tourism, food production, ceramics and everything in between. As a one-stop option, several blue-chip holding companies have their fingers in all of those pies — and a few more.

Between the end of the war and the middle of last year, the All Shares Index typically placed at or near the top of the world’s exchanges, with gains of 125% and 96% in 2009 and 2010, respectively. It slipped a bit in 2011, with profit taking cited along with worries over government debt, tight credit and trade deficits. It is down about 10% so far in 2012.

There is a modest 0.03% fee on trades, but any other upside can be taken right to the bank: Sri Lanka has no capital-gains tax.

John Keell’s Holdings, with interests in tourism, transportation, retail, real estate, tea plantations and other sectors, is the largest listed company on the CSE. The company’s profits were up by 46% through the first nine months of 2011, with revenues rising 28%.

About 45% of its float is held by foreign investors, including the Janus Overseas Fund (US:JNOSX), which bought a 12% stake about two years ago.

“I certainly can’t complain” about business levels, said Krishan Balendra, Keell’s head of corporate finance and strategy. “Generally, the government is pro-private-sector, and the private sector is the main engine of growth as it always has been. The biggest difference now is that we have got an environment of no war.”

Money on the ground
On the sun-drenched shores of Weligama Bay on the south coast, Nahil Wijayasuriya, a local business tycoon and chairman of East-West Properties, is watching his 200-room hotel rise from the sands. He has an agreement with Marriott (US:MAR), which will brand and manage the property, located within easy reach of nearby Galle, and about 90 minutes from Colombo via a new Western-style expressway. It is also within striking distance from Hambantota, site of a new deepwater harbor and international airport that is, not coincidentally, the home political turf of President Mahinda Rajapaksa.

Wijayasuriya, who has or has had diverse interests around Asia including real estate and broadcasting, was holding a lot of his assets in cash.

But devaluation “threatened to turn it into toilet paper, so I decided to put some more money on the ground. And I have found that I can make more here now than I could in Singapore or the Philippines.”

Along with Marriott, other hospitality firms are eagerly eyeing Sri Lanka, which has seen annual visitor traffic double to roughly 900,000 over the last few years. Hong Kong–based Shangri-La last month broke ground on two new resorts. Starwood (US:HOT) and Hyatt (US:H) have also given the market at least the once-over, according to local media reports and government sources. Related story: Civil war over, Sri Lanka tourism blossoms.

Forecast: Cloudy, with chance of monsoon
There are some thunderclouds on the horizon — and not just related to the seasonal monsoons that lash both sides of the island depending on the time of year.

The value of Sri Lanka’s exports grew by 22% to $10 billion last year, but imports more than double that. There has been a big drive to become more self-sufficient in food, but, with little traditional heavy industry or petroleum, every car part and every gallon of gas has to come from abroad — bought and paid for in hard currency.

The government also removed some subsidies on fuel, leading to sharp price rises that are rippling through the supply chain and causing considerable pain at the lower end of the economic spectrum.

Worse, Sri Lanka gets roughly 90% of its oil, on favorable terms, from Iran. Sri Lanka has already been denied a waiver of U.S. sanctions on trade with Iran but can’t easily replace that supply as the only refinery is geared toward the specific composition of Iranian crude.

President Rajapaksa, billboard-sized pictures of whom seem to be at every crossroads, still enjoys a deep reservoir of goodwill for putting paid to the Tigers once and for all — a feat that none of his predecessors managed to get close to achieving.One aspect of his governance that rankles some is what could be seen as perhaps an overreliance on family members to help him run the show. One brother is secretary of the Ministry of Defense, while another is the minister of economic development and a third is the speaker of the parliament. Other relations enjoy high posts in government-run enterprises, the diplomatic corps, provincial governments, etc.

Late last month, a report from Fitch Ratings said that the “sharp official reserve depletion in the second half of 2011 has increased risks on the sustainability of its balance of payments.”

The IMF lends a hand
The International Monetary Fund has been lending a hand to keep things from getting too far out of whack, with loans already delivered and more on the way.

Koshy Mathai, the IMF representative for Sri Lanka, said he is generally satisfied with what the government has recently done to make the exchange rate more flexible and to tighten monetary policy, along with making money-losing state fuel and power monopolies pay more of their own way.

Sri Lanka, he said, “is blessed in that if you look at the debt-to-GDP-growth ratio ... they should be able to bring the debt down quite nicely in the next few years.”

He believes the medium-term prospects for GDP growth will remain in the 8% to 10% range, he said, especially if the country integrates more with other fast-growing economies in the region.

“More needs to be done by the private sector,” Mathai urged. “Right now, there is hardly a corporate bond market to speak of, and getting long-term finance from the banks is very difficult.”

Spreading the wealth
Whether Sri Lanka can sustain what its boosters like to call the “Wonder of Asia” will in large part depend on continuing to ease barriers to investment while maintaining political stability.

Crucial to the latter is ensuring that the newfound prosperity is shared, at least to some degree, across the ethnic and economic divides.

At the moment, unemployment, at 4.9%, remains low, while the nation’s central bank says that there has been a sharp reduction in poverty rates, from the 25% range in the 1990s to below 9% in 2009-10.

There have been a few protests, some violent, at the rising cost of living, especially when it comes to fuel and electricity. But the government has been able to keep a lid on most dissent due to the general economic expansion.

Rajapaksa Inc.?
President Rajapaksa’s office declined to grant an interview.

“The politicization of many institutions has undermined public confidence,” said one Western diplomat. And many of the appointees “lack the cosmopolitan experience or skills needed” to perform their duties.

Getting cleaner by the year
It’s impossible to know whether Sri Lanka is more or less corrupt under Rajapaksa’s government than previous ones. But Sri Lanka did move up a couple notches on Transparency International’s Corruption Perceptions Index last year, from 91st place to 86th place. That put it a bit behind Thailand and China but ahead of neighboring India, along with Vietnam, the Philippines, Pakistan and Russia. The U.S. checks in at No. 24.

The question isn't really how much corruption there may be but what form it takes and whether it drains the life out of what would otherwise be profitable pursuits for everyone involved.

“If it is predictable and consistent in its application, we can cope with it,” commented one local economist, perhaps paraphrasing the old American definition of an honest politician as one who stays bought.

Source: MarketWatch

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Market downturn a natural phenomenon

Ceylon FT decided to share the perspectives of a renowned capital market industry professional, Nishan Sumanadeera, who pointed out the strategic way forward for Sri Lanka’s Capital Market to reposition the country as an investment safe haven for both local and foreign investors.

A top Investment Banker, Nishan Sumanadeera had facilitated the some of the top investment ventures and transactions, and has mulled some of the biggest investments made by listed companies during last three years.

In an exclusive interview with Ceylon FT, Sumanadeera shares some of his perspectives on the current dilemma faced by Colombo Stock Exchange (CSE).

Q: As a person who had been involved in the financial industry for a significant period of time, do you think the regulators should be blamed for the current crisis?

A: The Regulator’s main role and responsibility is to regulate and create an orderly market to provide a level playing field for all investors. One cannot blame or applaud the Securities and Exchange Commission (SEC) or Colombo Stock Exchange (CSE) for the negative or positive movement of the stock market. It is the market forces such as demand and supply that determine direction of a market. The outcome of many variable factors affects the creation of these negative and positive market forces.

Some factors are internal while others are external. Some may be controlled and some may not be. If any individual or institution tries to interfere with these free market forces, it will eventually result in dire consequence similarly to what was witnessed previously. Therefore I think SEC or CSE should not be blamed for the current crisis.

Q: Do you think the current inaction of the SEC and CSE is acceptable?

A: Currently the Colombo Stock Market is going through a phase of market correction. This is a natural phenomenon seen in all stock markets. Any immediate action without a clear foresight would only result in a short term result with no long-term sustainability or benefit. What is required right now is to have a uniform set of regulations that is conducive to the market, which will remain in force for a reasonable period of time. Frequent changes to regulations will only result in uncertainty in the minds of the investors and uncertainty is one of the greatest enemies of an active market.

Therefore it is important for SEC and CSE to take the Right Decisions instead of Quick Decisions. Time is not a critical factor or of an essence.

Q: What action should the SEC take in order to regulate the market?

A: Whatever decision taken by the SEC that affects the overall sentiment of the market should be taken with considerable duty of care and responsibility. It is important to consult all stakeholders of the industry such as Stock Brokers, Investors, financiers and policy makers before arriving at a decision. Currently we do not see much involvement of the investors and financiers in this process. Therefore it may be good idea for the SEC to encourage and develop these various interest groups so that the decisions taken by the SEC is not only widely accepted and also fall within the overall economic and development objectives of the country.

Apart from regulations, I also believe it is very important for the SEC to educate the investors. One of the main reasons for the anxiety of investors is the lack of proper understanding and knowledge of the risk return co-relation and inherent risk factors affecting equity markets. Any high return that can be achieved from investment in equity market comes with the greater risks. Particularly retail investors and new entrants to the stock market, which represent significant segment of the market, should be made aware of these inherent risks. This process should begin at School level.

I also believe that SEC should place considerable importance to the area of Equity Research. Currently we notice that various Research Companies and Stock Brokering companies without proper diligence release research reports and issue recommendations with regard to the direction of the market without proper analysis or basis. It may be important to regulate these areas by issuing licences confirming their competency.

Q: How could SEC and CSE ensure that the market moves towards positive territory and reaches the level that was previously achieved?

A: It is not proper for us to expect regulators to promote the stock market, value companies or speculate with regard to the direction of the market. Recently I have noticed some regulators stating that market is overvalued and fundamentally good stock are still cheap etc. I think these types of statements are inappropriate and should be discouraged, as it will only send the wrong signal to the investor community. Stock valuations and analysis should be entrusted to experts of the relevant industry that posses the required knowledge and expertise.

Q: What do you think of the current credit rule and how should it be improved?

A: Credit is an important aspect of any growing economy. Credit will provide many opportunities to businesses and contribute to the betterment of the society in general. Likewise over extension of credit could lead to many serious crises such as subprime mortgage crisis, credit default etc, which some countries witnessed during recent past. Therefore credit to any industry should also be provided with certain set of rules and guideline. Best example is how Central Bank regulates Bank and Non Bank Financial institutions.

We do not see any depositors blaming Central Bank for low interest rates or Banks complaining about statutory ratios and credit rules. But we have recently noticed many stockbrokering companies and investors talking about credit rules and blaming the SEC. My belief is that credit should be based on Net Asset Value and liquid assets of the brokering companies and SEC and CSE should monitor these ratios at Macro Level instead of Micro Managing Broker Credit.

Q: As an Investment Banker, what would you think is the best way to promote the market?

A: As we are all aware the current inflow of investment to the country is not at desired levels. Our FDIs are close to two per cent of the GDP. There are many reasons for this, some are beyond our control, but what is in our favour is the positive outlook of the country and the fact that we have peace today after 25 years of civil war. As a result the country’s economy has been growing at a steady pace of eight per cent opening many investment opportunities. It is important that as responsible investment bankers we take the responsibility to promote the country and the stock market outside Sri Lanka. This will not only increase the inflow of the inbound investment but will also help the country to strengthen the rupee against the other currencies.

It is quite noticeable that upsurge of the market beyond the benchmark valuations was as a result of local buying and selling in anticipation of large-scale inflow of foreign investment to the country. This scenario could result in a stock market bubble and crash unless carefully addressed. It is interesting to see how pension and other large-scale local funds intend to exit from their current investments. It may be a wise decision to set up an investment promotion arm with the required market expertise in investments and marketing to promote these investment opportunities outside Sri Lanka, which would certainly help the stock market and the country to move further towards positive direction.

Q: Do you think the Market is over-regulated?

A: This is a mere perception. I believe that there are certain rules and regulations that require be put under the microscope in order to determine whether it has achieved the original objective. These may include Price Band, Credit Rules etc. The market requires foolproof regulations and only such regulation can create a level playing field for investors, which will be conducive to the overall development of the market. A market without regulation would be like a car driven on the Southern Highway without brakes.

Q: How would you think manipulation of stock should be curtailed and manipulators should be punished?

A: Firstly I would like to avoid the use of the word ‘manipulation’. No person is a manipulator or involved in manipulation until such time the person is found guilty of an offence. One cannot blame investors for making use of the available opportunities to enrich themselves. This is a natural human behaviour. In the past we have noticed the collection of shares in the backdrop of bad news such as bombs, tsunamis etc. Therefore it is the responsibility and the task of the regulator to ensure that they remedy and rectify these loopholes instead of blaming the investors.

This is a very vast subject; therefore it is difficult to discuss at length now. But I will take illiquidity stocks, which have become a much-discussed topic during recent past as an example. As per the CSE listing Rules there is minimum amount of shareholdings that should remain with the public in order to qualify for a listing. This quantum will vary depending on the type of the listing sought. This is a very good rule. But then what does the Takeover and Merger Code, which is monitored by the SEC say. It says that if any shareholder or an acquirer exceed 30% threshold of a listed company will have to make a mandatory offer in respect of the balance shareholdings. This situation will make companies totally illiquid by reversing the listing rules that stipulate minimum public float. These types of rules require careful analysis and amendments.

Courtesy - Ceylon FT

http://www.ceylontoday.lk/news-detail.php?news_id=1512&news_category_id=24

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Budget 2012 conducive to exports and logistics

The shippers’ academy views the proposals made at the budget 2012 as a positive budget in respect of exports and logistics said Shippers’ Academy President Rohan Masakorala.

He said although exports were growing we have seen over a period of time exports as a percentage of GDP has been decreasing and that was not so healthy situation.

The academy believes the government must have taken this development into account and have come with multiple measures to help exporters.

“The currency devaluation by 3% announced by President Mahinda Rajapaksa shows that government was keen that our exporters were given breathing space and a jump start as the regionally competing countries over a period had depreciated their currencies and was eroding our competitiveness in the global markets”, Masakorala said.

We also saw the policy directions announced by the government to further diversify our export markets and announced the commitment of the state to work towards more trade oriented bilateral agreements with emerging markets, we sincerely hope that this will be driven as a priority and action will be taken soon.

Thirdly we saw the government announcing the three free port zones in Colombo, Hambantota and Tricomalee, this would certainly help the country’s aspirations of becoming a trading based logistics hub where the volumes could be enhanced,we believe this would help both port and airport activity to increase traffic in the medium term and also bring in international investors to set up operations in Sri Lanka to facilitate regional storage and distribution, as Asia is expanding inter regional trade volumes. The policy statements made on exports and logistics by government is very encouraging, how ever we have to have a decisive action plan to implement these in order to make a real change, whilst we have seen a major infrastructure expansion drive since the end of the war, we now need a clear reform agenda in the laws and the way we facilitate trade.

Masakorala said “Laws should be simple, transparent and should not give mix signals to the world. The trading and service laws have to be simplified along with trade facilitation with ICT to reduce process time. Government institution should be equipped with better IT environment and technology to speed up trading and logistics activities”.

We feel that the government has missed on its commitment to bring in anti-competitive laws and a regulatory reform to establish better competition as announced in the 2011 budget.

This should be task we should not forget as our exporters and importers given their size (relatively small in world standards with less negotiating power) are vulnerable to unfair trade practices by both buyers and service providers. This situation is very bad for the exporters, SMEs and consumers.

The country should now promote FDI in the field of logistics. For this purpose any entry barriers and land restrictions should be dealt with immediate action. we have to attract large investments and globally strong service providers who are looking for locations in Asia to set up hub more operations. we have to get those companies to come to Sri Lanka so that they will have the ability to move large volumes of business to the country for transshipment, storage, value addition and re-distribution. Economies of scale is a fundamental requirement for a hub. Free port concept will help this, but we feel lots of laws have to be reformed on an urgent basis.

We hope the BOI will play a greater role and will be equipped with the necessary reforms for it to be a real one-stop-shop that could help the country to be a modern trading hub.

The importance of knowledge to the work force to service such an emerging economy should be emphasized.

Our labour force with proper training, skills and attitude can beat the rest of the world.

But we need serious commitment and leadership from government to drive the policies announced in the Budget. Otherwise we may fail.

Courtesy - The Sunday Observer

by Lalin FERNANDOPULLE

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Sri Lanka Equity Forum celebrates two years of success

Having launched Sri Lanka’s first-ever equity investments and financial information portal, Sri Lanka Equity Analytics (www.srilankaequity.com) recently celebrated its successive second year of operations by reaching the milestone of 5,000 registered online memberships and over five million hits.

Sri Lanka Equity Analytics is a financial portal designed to address varying needs of the investment community of Colombo Stock Exchange (CSE) and had been live since July 2009. The Portal is already gaining momentum among international investors to attract equity investments to Sri Lanka according to company’s officials.

Sri Lanka Equity Forum had been grown steadily with over 80,000 articles relating to the Colombo stock market and boasts over 500 live members during active trading hours. In addition to the live discussion forum, Sri Lanka Equity Analytics has ventured into other ancillary services such as to equity research, live broadcasting of stock market events via live streaming TV, web based news and travel information and expected to launch first-ever virtual stock market simulation game based on live stock market data.

“We are very proud to say that Sri Lanka Equity Forum had become the country’s No. 1 stock market news and live discussion platform for equity investments in Sri Lanka with strong base of social network,” said the Administrator of the Forum Loren Quibit.

She further noted that the forum itself had been reflecting the true investor sentiments in Sri Lanka and many instances have given right signals to its members. “This was evident in posts and replies made by members,” Quibit added. “We need to emphasise that this is only the beginning, as we move along we will add more features and information. This will eventually make the array of information on the portal bigger and better,” she said.

There are many people who had benefited from the Sri Lanka Equity Discussion Forum. “I have been one of the keen followers of Sri Lanka Equity Forum. I must confidently say that this Forum has helped me to enhance my knowledge on stock market investments. Thanks to Sri Lanka Equity Forum I have made reasonable income much more than bank interest from the Colombo Stock Market,” said Samantha Jayasuriya, who trades from Anuradhapura.
Since 2008 the local individual investor contribution to Colombo Stock market turnover increased from 22% to 44% in 2010 and Sri Lanka Equity Analytics had been one of the driving forces that mustered retailers to connect with market and the large investors according to analysts.

Members highlight that the forum helps the retail investor through its well structured categories and sub-domains which provide stock market research, fundamental and technical analysis with the support charts and graphs, expert analysis and member help section. Further, there are separate sections to keep the astute investor community entertained during off market times with poems, sonnets, songs and riddles about the country’s listed stocks. The forum had developed with many local and foreign moderators in different time zones such as the United States of America, United Kingdom, India, Malaysia and Australia to monitor the activity around the clock. This forum itself could be described as a free resource centre platform that could be helpful for financial and research analysts, investment advisors to identify, study and analyse investor sentiments on the market and stocks, a top analyst said from the industry.

“The forum is a tool for financial journalists to get their scopes and master the headlines in print and electronic media as well,” another member of the forum Janith Wijenaike said.
 “We are very excited about our Sri Lanka Equity Forum launch and we hope to provide quality information to the very active and enthusiastic investment community here in Sri Lanka,” said Dylan Koelmayer, the Head of Information Technology at Sri Lanka Equity. Founded by a team of professionals with many years of experience and expertise in the equity and capital markets and journalism in Sri Lanka; with the launch of the forum.srilankaequity.com; that was deployed by Colombo-based Global Media Networks Ltd. for the Colombo Stock Exchange (CSE) acts as a real time data vendor and a hub that connects retailers and big time investors at CSE.

The Sri Lanka Equity Forum further keeps Sri Lankan investors connected via the other features such as RSS feeds, email alerts, Twitter and Facebook. Sri Lanka Equity Forum also provides a free Short Message Service via mobile operations in over 100 countries including Sri Lanka to keep the global investors updated with latest information about the CSE.

Courtesy - Daily FT 

http://www.ft.lk/2011/11/29/sri-lanka-equity-forum-celebrates-two-years-of-success/ 

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Lanka on track for fast economic growth in 2012

Leading international market research company, Nielsen said that Sri Lanka would record rapid economic growth in 2012, with consumers in rural areas coming to the forefront of economic activity. Nielsen, launching its 2012 Outlook for Sri Lanka, called upon investors and the private sector to focus on the rapidly developing rural areas.

Nielsen forecasts increased consumer spending in 2012, adding that Sri Lankan consumers were aggressively moving towards lifestyle products that have now become essentials and engaging in impulse buying.

Nielsen’s Managing Director in Sri Lanka Shaheen Cader told the launch of the Report that companies should work to leverage the growth momentum. “Sri Lanka is slightly different from the rest of the world in that we see more growth in 2012.There is an emergence of a savvy rural consumer that companies need to consider,” he said.

The other key points highlighted by Nielsen include the large-scale buying of vehicles with over 50 percent of Sri Lankan households owning at least one vehicle in Sri Lanka. (There are around three-million vehicles in use countrywide). Vehicle sales and registrations have risen sharply following duty cuts for all categories of vehicles, including hybrid and electric vehicles.

Nielsen, said that there was a trend where consumers were moving more towards borrowing for their spending. Inflation effects resulting in higher food prices remain the main concern towards 2012, even though Sri Lanka has maintained a rate of 7 percent on average this year, Nielsen said.

Meanwhile, Sri Lanka has secured a record US$ 1 billion in foreign direct investments this year, Deputy Economic Development Minister Lakshman Yapa Abeywardene said.”By November 2011 we had posted the highest ever volume of foreign direct investment,” AFP quoted the minister as saying.

In 2010, Sri Lanka raised US$ 516 million in foreign direct investments, compared to the US$ 602 million in 2009.Sri Lanka is attracting many regional investors, with India in the lead.

Indian investors are exploring emerging markets such as Sri Lanka as they offer higher returns than investments in developed countries whose economies are slowing down, PriceWaterhouseCoopers (PWC) officials told a forum in Colombo. Many Indian companies have shown a keen interest in infrastructure, financial services, tourism and healthcare.

Indian firms have acknowledged Sri Lanka’s rapid growth and rising personal incomes, Anand Dikshit of PWC India said. “Indian investors are exploring emerging economies such as Vietnam, Africa and Sri Lanka.”

Sri Lanka is back on the investment radar after the end of terrorism in May 2009. The economic boom has increased imports of machinery, building material, transport, and petroleum products this year.

Courtesy - The Sunday Observer.

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Thirty Five New Hotels On The Cards

The Galadari and Hilton Hotels in the heart of Colombo, Be ready for a change in landscape with the construction of 35 new hotels AND Eleven five star hotels to be constructed in Colombo

As Sri Lanka prepares for the arrival of 35 new hotels in the country, concerns have emerged over the human resources to accompany such ventures. According to Srilal Miththapala, President of the Tourist Hotels Association Sri Lanka, the population in the rural areas will not be enthusiastic about the hotels.

Minister of Economic Development, Basil Rajapaksa, told the media that the 35 hotels will be set up all around the country. Eleven five star hotels will be constructed in Colombo: two five-star hotels in Gampaha, one in Negombo, four in Beruwala, two in Jaffna, seven each in Batticaloa and Trincomalee and one in Nuwara Eliya. The government has not yet released the names of these hotels.  Project manager of Sri Lanka Tourism Development Authority, Nimalka Morahela, told The Sunday Leader that the Marriott, the Hyatt and the Shangri-La have all expressed interest in these areas.

The Sunday Leader spoke to Miththapala about the new hotels that will be constructed and what impact it will have on the tourism trade. He explained that despite this move being welcomed, there is a concern over whether or not Sri Lanka has the human resources to sustain these hotels. ‘In rural areas many people are still hesitant to work in the hotel business due to their culture. Employing and training these people could be an issue, something that will have to be rectified before the hotels are established,’ he said. Miththapala added that the people will need to be educated on the benefits of such hotels being set up in their areas.

When asked about the reaction in the local hotel scene to the news of the 35 new hotels, he responded that both the Tourist Hotels Association and the local hotel chains have supported the venture. He said the local chains viewed this as assistance in promoting the tourism trade. Miththapala explained that ‘when an international hotel chain sets up in a country, they will make sure that they advertise not only the hotel but also the country. They would make the destination attractive in order to sell their hotel to tourists.’
Miththapala’s sentiment was shared by Chairman of the Jetwing Group, Hiran Cooray, who welcomed the news of the international chains arriving in the country. He explained that he was unaware of the 35 new hotels, but was excited about the Shangri-La setting up a hotel in Colombo. He stated that such hotels would only serve to lift the standards in Sri Lanka, while also adding that the Jetwing Group is looking forward to competing with these hotels.

Asked whether he believed Sri Lanka attracted the tourists from the economic bracket that would patronise these five star hotels, Cooray responded that it is necessary for such hotels to establish themselves in the country if they want to attract such visitors. He admitted that currently the number of high end tourists is not where they would like it to be, but added that the figure would rise.  Cooray said that he welcomed the news of the arrival of the Shangri-La as, ‘they were a chain that not only brought plans but also invested their own capital in the hotel’. He added that many other international chains often expect the local country to invest capital in the hotel.

When Srilal Miththapala was asked about whether the current  tourists visiting Sri Lanka would furnish five star hotels, he responded that, ‘at this point it is essential that the government attract such tourists. The existence of these hotels will go a long way in doing so’.

Miththapala admitted that the current figures for tourist arrivals is misleading, explaining that in Sri Lanka there are two segments that fall within the bracket of tourists but do not contribute to the tourist trade. First is the transit tourist, consisting of tourists who come to Sri Lanka and stay as long as 36 hours before travelling to another destination. He added that often these are South Indian tourists who use Sri Lanka as a gateway to Europe. Unfortunately they contribute very little to the local economy, choosing to stay in cheap accommodation close to the airport. The second segment is the Diaspora which visits family still living in the country and as such they contribute little or nothing to the tourist trade.

When these two segments are removed from the tourist figures, the overall figures drop by about 15 percent according to Miththapala. He explained that the actual number of paying tourists may not be enough to fill all 35 hotels all year round.

With concerns over whether or not the current batch of tourists visiting the country would choose to stay in five star hotels, the existing hotels occupancy rate was examined. The Cinnamon Grand and Galle Face Hotel in Colombo have both recorded their occupancies at close to 80 percent. Down south, hotels such as the Fortress has an occupancy rate of 65 percent.  Despite these figures, the coastal towns see most of the tourists choosing to reside in the cheaper guest houses.

The new hotels will also be forced to compete with the growing number of boutique hotels, something which tourists in this region appear to prefer.  A British tourist, James Wilson, told The Sunday Leader that he was staying at the Cinnamon Grand in Colombo before travelling to the Sun and Dutch house in Galle, a boutique hotel. When asked why he did not stay in a five star hotel, he responded that the boutique hotel is a more attractive and comfortable option.

Certainly if this is a growing trend, it will be a cause of concern for both the government and the international hotel chains planning on coming in to Sri Lanka.

Courtesy - The Sunday Leader

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Unprecedented Opportunities

Unprecedented opportunities for Investment Banking - Frontier Capital Partners CEO Nishan Sumanadeera  

Frontier Capital Partners Ltd, under two years from its inception, has reached the forefront of the investment banking industry in Sri Lanka, surpassing many renowned and leading investment Banks. During this period, it facilitated many mega deals, including many investments made by listed and unlisted companies. In 2009, it facilitated the C.W. Mackie sale to Lankem worth over Rs.1.4 billion, the Confifi Hotel Group sale to LOLC and Browns group worth Rs. 2.5 billion last year and this year,  the Softlogic Holdings’ acquisition of Asian Alliance Insurance worth over Rs.3.3 billion, surpassing all big numbers of major acquisitions this year. Here, the company’s Managing Partner/ CEO Nishan Sumanadeera is in conversation with The Island Financial Review.

Q: What is your core business?

A: Ours is a boutique investment advisory firm doing fee and fund based activities both in Sri Lanka and abroad.  Our core team, with their diverse expertise and experience in different disciplines have leveraged their professional experience and personal relationships with the extensive networks throughout the world to bring the best solutions to business needs of our clients.

We provide cutting edge and tailor-made investment strategies and solutions to our clients throughout the entire spectrum investment cycle from the point of entry to the exit. These solutions range from the initial formation of businesses, financial feasibilities, business modelling and appraisals, to promotion of investment, facilitation, arrangement of equity and other types of funding into new and existing projects. Mid term strategic solutions include capital market activities, business expansions and diversification, corporate finance services such as takeover and merger advice, deal facilitation and execution, mezzanine finance arrangements and equity placements.

We also provide advise and assistance relating to restructuring, recapitalization and end term solution such as disposals, divestments and liquidations of businesses in order for our clients to realize capital gains and exit from a particular investment.

Apart from the core business activities of investment banking, we have refocused on some of the activities traditionally considered as cost drivers by many organizations. We have revolutionized and created a platform to monetize these cost centres/activities to be core strength of our business. These services include Legal & Company Secretarial Services, Equity Research, Media and Information Technology.

Apart from our fee-based activities, we have already made few strategic investments in Sri Lanka. We continue to identify new opportunities and make further investment in niche growth sectors. Currently we are in the process of raising US$ 10m from strategic foreign investor who had already pledged to be our long-term technical and financial collaborator. We are targeting a listing on the Colombo Stock Exchange by 2015.

Q: What made you venture into these specialized businesses?

A: Being involved in Investment Banking and Legal services for over 15 years in many investment banks including that of Asia Capital PLC as the Head of the Investment Banking and Legal Divisions, it was very easy to understand the synergies of providing complete legal and financial solutions under one roof. However, integrating information technology and media into the core business was novel and revolutionary. Regardless of these synergies, we always maintain Chinese walls between each activity to ensure confidentiality and independence of advise.

Q: What are your perceptions of the recent legislation for acquisition of under- performing Assets and the decision to depreciate the Sri Rupee against major currencies?

A: Any legislation or initiative to improve the efficiency and the performance of any enterprise or underperforming asset should be welcomed. As businessmen and entrepreneurs we constantly compare Earnings per Share (EPS), Return on investment and assets (ROI). There are other performance measurement yardsticks of competing businesses to determine the efficiency and performance. When performances of our companies and its subsidiaries are below benchmark, we as stakeholders often take decisions to divest, capitalize or liquidate businesses. As a responsible government it is important to maintain a steady pace of growth by ensuring efficient performance of assets and businesses that have greater impact to the country and its people. Therefore government decision should be welcomed for greater interest of the country provided that such acquisitions are handled transparently in an accountable manner.

Devaluation is imperative against major currencies in the backdrop of the global debt crisis. Although I am great believer of free movement of currencies, in which demand and supply determine the equilibrium of the exchange rate, I believe current exceptional global crisis requires timely and more radical action to redirect our economy. Overnight depreciation of the currency though radical, I believe is the only way to prevent market speculation, which would have resulted in greater risk to the economy. Sri Lanka being an import- driven economy this move is likely to have greater short term pressure on inflation and interest rates.

Q: What are the future opportunities for Investment Banking?

A: They are unprecedented. As an investment banker, you live in your own imagination, the essence of success. It is hard to find textbook investment banking solutions to complex real life opportunities. Every investment banking solution needs to be tailor-made and requires out- of- the- box thinking. Imagination has no boundaries. It is only when the last tree has died and the last river has dried and the last fish been caught that the investment banker will run out of solutions. Sri Lanka is not for sale but businesses will change hands at least one more time during the next decade paving way for many opportunities.

Decades ago, investment banking solutions revolved around resurrecting sick companies via restructuring, but today Mergers and Acquisitions (M&A) activities have become order of the day. I would see many opportunities in this area. Further, Sri Lanka needs capital to rebuild and grow in this post-conflict period. The capital available in Sri Lanka’s corporate sector is limited and it is here that Investment Bankers can play a major and catalytic role in promoting foreign direct and portfolio investment. Sri Lanka’s corporates must engage Investment Bankers with international reach in order to access foreign capital. For example, John Keells Holdings would not have been able to build South Asia Gateway Terminals if it did not access international capital markets via investment bankers in 1994. SAGT now contributes nearly 40% of JKH’s earnings. Therefore, the role that Investment Bankers can play in developing Sri Lanka is immense.

Q:How did the local investment banking industry evolve in the last two decades?

A: Investment banking has evolved from being just an impressive word spoken in corporate boardrooms into real life, everyday solutions practiced and adopted by investment bankers and investors collectively to add shareholder value via capital market activities.

With the introduction of the Companies Act in 2007, legislation in Sri Lanka added more flexibility and diversity, which has undoubtedly helped investment bankers to innovate new solutions within the existing legal framework of the country. This was a welcome change, and I must say was the turning point of the industry.

With these changes together with capital market boom, current day Investment Bankers have the opportunity to provide a variety of services, which was far-fledged and unimaginable two decades ago.

Q:What are the growth ingredients for Sri Lanka?

A: As an analyst it is very difficult to determine ingredient or conditions for growth. We can characterize the successful economies of the postwar period, but we cannot name with certainty the factors that sealed their success, or the factors they could have succeeded without. It would be preferable if it were otherwise.

Many countries have grown, for a time, on the back of a much shorter set of policies and reforms. But we suspect that over the course of 10 or 20 years of fast growth, all of these ingredients will matter. Low inflation, for example, will not compensate for poor education or backward infrastructure. To sustain growth over a long period, a set of things needs to come together. Doing some basic things may produce beneficial results. But the items the policy maker neglects will eventually haunt the economy’s progress.

Q:What are the inherent risks in investing in Sri Lanka?

A: Emerging Sri Lanka vouches for economic, regulatory and political stability, the hallmark of any good investment destination. No place on earth is risk-free, likewise no investment. Each country has its inherent risks factors, currently geopolitics affecting Sri Lanka should be an important factor in your watch list.

Private investment and Investment Banking needs policy consistency, coherence and transparency in order to flourish. Therefore the government should look to build on these areas, which will in turn help build confidence in Sri Lanka’s capital markets.

Q:After the phenomenal rise of the All Share Index (ASI) by 284 percent to a high of 7,797.96 on February 28 the market euphoria is now gradually receding with the index falling below its lowest ever during the last two years. What do you think of the direction of the Stock Market?

A: The market had already enjoyed peace dividends and time has come for investors to adopt a more prudent approach towards the stock selection instead of chasing behind rallies and leveraging their portfolios in anticipation of higher returns. Investors need to identify value stocks, based on fundamental analysis and Value For Money (VFM) approach involving analysis of strength and weaknesses, future growth potentials, opportunities and threats applicable to respective businesses.

The market is in the stage of correction and consolidation and Colombo’s investor sentiments will be no longer be influenced by IPO’s, illiquid trading or irrational market behaviors which had been a hallmark during last two years.

In future, investors are likely to be more prudent and likely to make their investment decisions based on corporate earnings and asset values. We are likely to a witness an uptrend of growth in stocks and blue chip shares during the next stage. Valuations of the stocks are likely to get attractive in the backdrop of higher quarterly earnings and market correction, which had resulted in nearly 25 percent decline from its peak.

Q:What are the best investment sectors in the CSE?

A: In an emerging market, as Jim Rogers said, you need to own a bank, a brewery and a newspaper!! The Banking sector will always remain, as a proxy to any emerging economy whilst beverages and media would have more than proportionate growth.

Sri Lanka is historically known to be a travel destination; hence the leisure and travel sector would always remain in the top drawer. There will be new lines of tourism; many people will come to Sri Lanka for their medical and higher education needs paving way for new opportunities. These new opportunities coupled with ageing Sri Lankan population will help health and education sectors to have a phenomenal growth. The infrastructure development, which is considered as the most, promising opportunity by emerging market investors, also should remain in your shopping list.

Q: How do you cope with market fluctuations?

A: It is generally easy to deal with matured investors because they understand the risk involved in capital market activities. It is retail investors that require frequent advise. As a seasoned investor you generally invest funds in different asset classes with varying risk return combination. Market investment is an art not a science.

Q:What factors are considered by "matured" companies when buying assets in certain sectors?

A: There are many factors considered by investors prior to engaging in a M&A deal. Some of these opportunities can be considered once in a lifetime, a dynamic businessman would not want to miss. It is their vision, dynamism, business acumen that drives them towards these opportunities. Mature companies and investors do not place too much significance on past financial performance, more weightage would be given for business synergies. Historical financial information cannot be considered a yardstick of the future growth potential as it has been proved wrong many times. Most of these mergers and acquisitions have happen depending on investment objective, appetite and style of the respective investor.

Q: What measures do you propose to arrest the declining stock market which seems to be sinking faster than the Titanic?!!

A: Any artificial measures taken by regulators against the free market movement is likely to result in prolonging the eventuality. Hence we should allow free market forces to determine the bottom. In the past we have seen many ad-hoc remedies resulting in failed attempts to rejuvenate the stock market.

Q: Can you spell out as to how much more it will fall?

A: Stock markets are subject downward and upward movement due to varying factors. These factors and its future implication usually result in negative or positive by sentiments of the investors. The global debt crisis and some of the international factors have resulted in negative sentiments of the investors’ community. These factors have resulted in lower demand for equity investments as against the other asset classes.

The Market is currently is in the phase of correction and consolidation.   It is likely to result in a downward trend until valuations become more realistic and reasonable. It is surprising to see some companies without any real business or assets of any value trade at very high multiple to its earnings or at a substantial premium to assets value. These valuations have to get corrected and total market capitalization should be close to value of businesses.

Likewise there are many companies with future earnings potential, which still trade at cheaper forward multiples. Share Prices will have to eventually reflect the corporate earning. Hence I consider this down trend to be an opportunity.

Q: Investors, who have pumped in US$ 2 billion into Treasury Bonds are  aghast at getting less Dollars with the depreciation when they exit. Some say that they want to exit what ever the losses were. Your comments?

A: Foreign Exchange Rate usually affects returns of the inbound investments. Sri Lanka used to have a steady Rupee depreciation of approximately 2% per annum during last 20 years. Comparatively our bond rates still far more attractive to foreign investors especially inconsideration of the investment risk and current global factors.

Q: The Government is also keen to commence  local industries  in consonance  with the theme : Apema ratak, Apema Deyak. How do you see the private sector sentiments in that regard?  Granted that earnings is the core business  of business. But, don’t you think that this is more noble than blue chips investing in hotels abroad ?

A: All business decisions of the private sector will have to make commercial sense regardless of whether these investments are inbound or outbound. Private sector would be more than willing to invest in local businesses in consonance with special themes, provided that theses investments which are commercially and financially viable.

Q: Sri Lanka is spending US$ 400 million in subsidizing the New Zealand milk farmer and another US$ 300 million  in sugar imports. What is stopping blue chip corporates looking at both these sectors not only  in terms of growth  in corporate earnings, but also in the national interest as well given that the trade deficit is projected at US $ 11 billion this year?

A: Sri Lanka is considering the benefits of import savings similarly to the export earnings. Corporate would certainly look at new investments in the area of import substitutes such as local Milk Powder and Sugar if necessary incentives are provided to the investors.

Q: There is a lot of hype on  public sector- private sector  partnerships. Given that  each IPO is  oversubscribed so many fold running into billions, why can’t the government  and the private sector team up  for, say, major  infrastructure projects  where the funds are raised here, without running to the World Bank, the International Monetary Fund  and  the EXIM bank of China where the latter’s interest rates are even higher than the donor concerns?

A: Oversubscription of IPOs does not necessarily means there is an abundance of excess cash. Some oversubscriptions were due to large sums of monies being given to investor by way of margin lending by banks. Agree that there should be fund raising with regard to infrastructure project, which could be funded jointly by government, Private Sector Companies and private investors.

Q: Don’t you think that there should be more companies obtaining listings, especially in the apparel sector?

A: Among factors which discourage companies from obtaining listings are stringent disclosure policies and regulation. Regulators should make listing simpler and straight forward. Regulators should provide more incentives for listed companies. There are more than 30,000 registered businesses but only 300 listed companies. This ratio should be at least 30%. Central Bank’s directives to make Finance and Insurance companies listed can be considered as a step taken in the right direction.

Courtesy - The Island

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