Fresh wave of interest in Lankan stocks, but not from within

The current bear run at the Colombo Stock Exchange (CSE), although remaining a sore for the locals, appears to have stirred the interest of a group of investors the country’s capital market has been in need for many years so badly – the foreigners.  
During the last four months or so, the foreigners have been accumulating the battered Lankan stocks – mostly on the fundamentally strong counters – but the danger is that all of them are waiting to cash in when the market turns for the better, beginning a bull run. 
According to the data seen by Mirror Business, the foreigners have picked up shares worth of Rs.28.0 billion and sold stocks worth of Rs.21.9 billion, resulting in Rs.6.1 billion worth of net foreign inflows during the period from January 02 to April 05, 2017. 
This is almost three times the net inflows to the market during 2016 but 3.5 times behind the net foreign inflows of Rs.21.8 billion in 2014 – the last time the Colombo bourse recorded a meaningful foreign inflow. Foreign participation in local stocks recorded a net inflow of Rs.2.3 billion in 2016 after languishing in the negative territory for over 11 months as the foreigners sold the shares due to local political uncertainty, lack of long term economic policy and the global market volatility. 
In 2015, the foreigners withdrew from the stocks to the tune of Rs.5.4 billion on a net basis. Investors once again are seen stacking emerging market stocks due to improving global economic outlook and favourable valuations. 

Emerging market stocks are trading at a 26 percent discount to those on developed markets based on estimated earnings for the next 12-months.
Some US $ 30 billion flowed into the markets during March alone – the biggest since January 2015— according to the Institute of International Finance. 
But what exactly draws foreigners into Lankan stocks is not clear as Sri Lanka is not an emerging market but a frontier market. 
A couple of weeks ago, Sri Lanka’s capital market participants were in Australia and New Zealand conducting roadshows to woo foreign investors and Sri Lankan diaspora in to the Colombo bourse. 
But why locals fail to see value in the undervalued stocks in which the foreigners see a bigger upside remains a paradox. 
The market is trading at 12.15 times the earnings, which is significantly down from 19.66 times back in 2014. 
The bitter taste of burning their hands during the 2010 and 2011 bull run may be keeping the local investors away from the capital market as there is still no guarantee that won’t repeat. 
The amendments to the archaic Securities and Exchange Act have been in the making for years and the alleged perpetrators of market misconduct are yet to be brought to books. 
Meanwhile, there is still no assurance that the capital gains tax will not apply to the stocks. 
Year-to-date, Sri Lanka’s stock market is down 0.48 percent after losing 9.66 percent and 5.54 percent in value during 2016 and 2015, respectively.