Instability in the eurozone is leading to rising risk aversion and global volatility. However, after an adjustment period, the capital flows may yield benefits to the Sri Lankan equities market, according to a top official at Ceylon Asset Management.
Michael Preiss, Director/Economic Advisor, Ceylon Asset Management stated that there will be difficulties in the short-term as the ripple effects of the eurozone problems start to hit but over the long-term he thinks it will be positive for Sri Lanka.
“Since investors who have traditionally focused only on Europe and the West are starting to see that there are better opportunities in Asian markets things will start to get positive for the country,” he said.
Preiss took the position that as the euro crisis deepens, countries in the EU will eventually be forced to inject liquidity into the system, as evidenced by the proposed 100 billion Spanish bailout.
“For a while, we will see European countries reduce overseas lending as austerity measures take hold but whether they like it or not, these countries will be forced to print more money.”
Consequently, Preiss stated that Sri Lankan investors ought to be prepared to invest in Sri Lankan equities from the third or fourth quarter if they are to capitalize on what could be a significant upswing in the Colombo Stock Exchange (CSE).
Preiss observed that the CSE was currently following a ‘J-curve’ which occurred on the back of a major boom over the last two years.
“If you speak to most people today about the stock market’s performance, they will say that it is doing badly and that is what is known as a contrarian’s indicator.
This means that it will soon be a good time to get into the market but remember it could get worse before it gets better both in the euro and the CSE,” he further stated.
“At present, Ceylon Asset Management is advising our clients to maintain 100 percent of their investments in the Ceylon Gilt Edged Fund, the Treasury bill fund since they offer risk free returns of 12 percent,” Preiss said. However, as the market begins to bottom out, the company recommends a 25 percent exposure to equities for their moderate risk investors. In that context, Preiss stated that officials will have only a small window within which they can successfully remedy regulatory issues and create a more transparent and investmentfriendly market.
“At the moment, the general perception of manipulation is a major problem. Sri Lanka can’t talk about competing on a global scale if these issues aren’t sorted out as soon as possible. You have to get the basics right,” the Director stated.
Aside from regulatory issues, Preiss stated that a lack of investment culture in Sri Lanka would also pose a challenge.
“There is a lack of awareness about investing and by this we mean long-term investment. We have been holding seminars in association with the SEC where we share thoughts on how to invest but there is more that needs to be done,” he pointed out. Preiss went on to state that one of the reasons why the United States has been so successful is that there is a prominent investing culture there and that is what Sri Lanka too must develop.
Further, despite the local and global challenges involved, Preiss stated that he was confident of Sri Lanka’s investment potential going forward. He pointed to developments such as the Central Bank’s decision to allow the rupee to float, in addition to signs of improvement in the trade deficit is good for the currency and the relatively healthy debt to GDP ratio of 80 percent are positive developments in this regard. “Overall, we see there are more positives than negatives. We have been hearing a lot from investors interested in Sri Lanka lately, from the Middle-East and Asia including Qatar and Japan,” he noted.
Certainly the Middle East, India and China still have a lot of capital to invest and they’re looking for attractive investment opportunities like Sri Lanka,” Preiss further said.