The Colombo Bourse despite making it to among the top performing stock exchanges in Asia last year has lost steam since of late.
The bourse witnessed mixed results last year with growth in the early months and a decline in the second half. Brokers complained credit rules imposed by the Securities Watchdog has hurt investments along with the resignation of its head and deputy.
In the wake of these developments LBR spoke to Prabodha Samaranayake, chief of NDB Aviva Wealth management, Sri Lanka’s largest non-state investment fund.
LBR: Turnover levels at the Colombo Bourse have fallen drastically while some big investors wound up their books last year. Do you think this situation is a result of over-regulation?
A: I think credit is a necessary for any business, so there should not be credit restrictions but whoever is giving credit must know who they are providing credit to and should be monitored in such a way that it will not lead to a systemic risk. Maybe moving towards a DVP (Delivery Vs Payment) or a clearing house type of solution will help reduce some of those risks.
LBR: To what extent do you think relaxation of credit can revive the market? Is that the correct direction
A: I am for relaxation of credit but I do not know if that is the only factor that will drive the market. Valuations, amount of money available, alternative investment instruments will drive the market. for example if interest rates go up people might start focusing on bonds as opposed to stocks. So there are many factors driving the market and credit is one of them.
LBR: What are your comments on the excessive speculation prevailing in the market? If it is not healthy what can be done to mitigate the situation?
A: I don’t really understand when people say excessive speculation because how do you define excessive speculation? What I see is some illiquid shares being drive up due to the lack of liquidity and that is the problem in the Sri Lankan stock market. We need to have a long term plan to address the liquidity issue. If you pump enough money in to any market it will take prices up. It’s the simple economics of supply Vs demand.
LBR: What are the indications of a solid and well moving market and where do we fall short?
A: I think a good market is one where most companies would want to come and list and there are a lot of investors who would want to participate in the market and a healthy level of liquidity; ample amounts of stocks being available for people who want to invest. Those are the factors that I would consider as signs of a healthy market.
LBR: As a fund manager what is your approach to the market right now? Most fund managers are said to be holding back their investments for the time being. What is your position compared to last year?
A: We manage around Rs 50 Bn of client money and have about 100 portfolios at the moment. Each of these portfolios belong to various different client groups and each client has their own requirement. Their risk and return criteria differ. Some clients do not want to be in shares and be in only in fixed income while the other clients prefer vice versa. So whenever those clients give us money we go to the market and invest continuously. So at given day we have buy positions as well as sell positions. It could maybe because there is money coming in or some investors withdrawing their money or maybe because we feel some shares are over-valued and therefore we will sell. So we will continuously be in the market. I cannot say that there is a period when we are completely out.
LBR: The Central Bank has downgraded economic growth forecast from 8.3 percent to 8.0 percent. How do you think this will impact the market?
A: Good question. My personal feeling is Sri Lanka is doing eight percent when there are other countries which have downgraded a lot more. Then there are big countries which are in recession. So I think we are in the best of the lot and in a very good position. Our companies will still continue to make money. If you look at the history Sri Lanka has been able to generate 4.5 to 5.0 percent of real growth rates so I think still 8.0 percent is fantastic. Markets are cheap and I think now is the time for investors to start looking at stocks again.
LBR: What is your outlook for interest rates and inflation?
A: There is some amount of speculation as to which way the interest rates will go. My feeling is that interest rates are going to stabilize because globally inflation rates are coming down and many countries have started cutting their interest rates and policy rates and that is going to impact Sri Lanka. You will probably see interest rates coming down.
LBR: Is there anything you would like to add in conclusion?
A: I believe Sri Lankans generally tend to look at the stock market as a place for speculation and a place for quick money. But I think given the stability that is there in this country and the growth rates that we are going to have in the next couple of years, I think now is the time for people to start looking at stocks as a way of investing.
Most Sri Lankan are used to bank savings and that is probably the only alternative available apart from housing or gold they would consider as a saving. Now is the time for people to start looking at the stock market as a long term saving destination. A lot of people have got rich by being in the stock market. all what they have done is take a long term view and be patient. I think it can be applied to a very small investor with even five thousand rupees.