Hyper-leap to a vibrant equity market 0 1010

 

In this exclusive interview with BiZnomics Magazine, the Chairman of the Colombo Stock Exchange Mr.Dumith Fernando, discusses the digitalization of the Colombo Stock Market. He also touched on the future investment environment in Sri Lanka. Fernando is Chairman of the leading investment banking firm, Asia Securities Holdings Ltd, which he has led for the last six years. He also serves as a member of the Financial Stability Consultative Committee of the Central Bank of Sri Lanka. With 25 years of experience in international and Sri Lankan capital markets, Fernando spent much of his career in global financial centers in New York and Hong Kong with global banking giants JPMorgan Chase and Credit Suisse.

What role will the ‘hyper-leap to the future’ play in creating a vibrant equity market for Sri Lanka?  

The “hyper leap” to the future, what it refers to is the digitalization of the stock market. The Chairman of the Securities and Exchange Commission (SEC) called for a joint committee of the Colombo Stock Exchange (CSE) and SEC with the intent of digitalizing some of the core activities of market and market participants. The goal was to digitalize as many of the stakeholder touchpoints, enabling end to end connectivity electronically with interactive user interfaces and interactive user experiences so that the stock market can be accessible to anyone with a smartphone. Early on we converted a lot of the statements to electronic form, for instance, CDS statement is sent via email, and companies listed on the CSE were allowed to pay dividends directly into their shareholders’ accounts, electronically. In the second phase of the initiative, we introduced a mobile application. A CSE mobile app that allows anyone from anywhere in the country to open a stockbroking and Central Depository System (CDS) account without visiting a branch of a stockbroker physically. It helps broad-base the market and brings a lot more individual investors onto the market, which is a fundamental part of creating a vibrant equity market.

How has the market performed in the past few weeks?

The activity levels and market valuations have gone up considerably. In the past few years, after 2015, every single year the average daily turnover in the market was under a billion rupees. It was Rs. 710 million a day in 2019. Today we are probably doing over Rs. 1.5 billion of turnover per day. On the 14th of October, there was a turnover of Rs. 5 billion, and the number of actual trades in the market was the highest since 2011. Before the lockdown, there was very heavy foreign selling in particular, and when the market reopened for one or two days you had markets falling about 13 or 14%. From that time what we have witnessed is local investors, seeing very good value in the market and taking advantage of this opportunity.

How will the market face a second scenario?

The market was closed for about 7 or 8 weeks in March through mid-May, a big part of that was the lack of full confidence that trades could be settled, due to the trade settlement process. So with the current digitalization move, we’ve asked brokers to get on board as many of their customers for online settlement and online payment to bank accounts. This allows us to be much more confident about operating the market even during the unfortunate eventualities of a lockdown or a curfew. In terms of COVID management we have performed much better, the markets and companies are better prepared now to deal with the COVID situation. So that’s why I think even if there is a second wave of any sort, companies are much better prepared for that and we would expect to see companies and the stock market also performing in a much more resilient manner than before.

What role has interest rates played in boosting the market?

This was a fundamental catalyst for the share market performance. Since the reopening after the lockdown, there was a precipitous drop in interest rates. Interest rates falling has always been good news for equity markets for three reasons.

First for individual investors in particular, if you’ve been sitting on high-interest rate deposits for the last few years they might sometimes be getting double-digit returns on fixed deposits. That has now fallen considerably. For a lot of people, the return they are getting on their money from bank deposits is just not enough.

That has made them shift to the equity asset class particularly because valuations were so low by the end of the lockdown. Dividend yields in the equity markets are probably about 3% so that combined with the price appreciation that have been expecting will give them a better return. Secondly, when interest rates drop, the finance cost of listed companies go down,  and with that comes a boost in earnings.  This resulted in some of these particular companies being highly geared and a boost in their earnings, leading to their stocks performing quite well. Third impact will be for those who trade stocks on margin. Their margin interest cost also goes down, then they are in a better position to get into the market. There’s a high degree of confidence that you can make more money in the market than you pay in margin interest costs. That is also one of the positive impacts of low interest rates.

Will we be seeing more IPOs in the coming years?

When people come to the market to list, generally we would look at two or three different things. High valuation, high price to earnings multiples, and high price to book value multiples in the market. These factors would assure much greater investor engagement. Sentiment and confidence also plays a big role, because it’s not just a matter of placing your shares in the market, you want the share price to perform well. Now we’ve obviously gone through a period where markets have been somewhat challenged. Even as of last month the valuations of our market were the lowest among peer countries. That’s one of the reasons why I think a lot of companies in the last three years have not gone out for listing.

We want to see more companies tapping into the public share market to raise money; raise capital for their growth. With the COVID-19 lockdown I think there may be a number of companies who have survived on bank financing, some challenges of the COVID impact may mean that raising equity is the way out of any sort of balance sheet challenges. So we would expect to see some of those companies as well, now considering equity markets. State minister for capital markets Hon. Nivard Cabraal has challenged the CSE to look at getting to 500 listed companies in five years. We’re at about 300 at the moment and that 300 hasn’t really changed over the last few years. We have been having promotional campaigns and doing various things to get them to come into the market but we are definitely going to have to redouble our efforts to push towards some of those targets now.

What is the outlook for the Sri Lankan economy in the medium to long-term?

I’m generally positive. We should expect to go back to 5 percent or 5% plus growth as an economy. Even though there is a lot of noise around the current sovereign rating downgrade and international debt repayments I’ve never had doubts about our October bonds being repaid. I don’t have doubts about our July repayment. Clearly there are concerns and fears! I’m not trying to say that the future or the next year or two is going to be easy but, there’s a lot of free space between it being easy and not being able to repay debt and I think we will definitely find the middle ground in that space to do what we have done for all these years, which is, never default on a sovereign issue.

Outside of that we are in a very good position. There’s a lot of infrastructure investment that still needs to happen, the road network and the country being better connected, the two ports being expanded, the Hambanthota Airport now potentially getting more utilized, I think the logistics infrastructure is a fundamental necessity for economic growth and it is all falling into place. We’re also seeing potentially quite positive wins from some of the government focus to move towards local manufacturing. If you look at local manufacturing stocks on the exchange, they performed extremely well in the last few months

One sector that is seeing a bit of slowdown and will do so in the next 12 to 18 months will be the financial and banking sector in particular. But with other parts of the economy growing and strengthening the banking sector will pull through.

We don’t have the answers to when the tourism sector will bounce back, it’s not a massive part of our economy but contributes about 4-5 % of the economy. It’s a big foreign exchange earner and there are quite a few jobs that depend on it. There’s a lot of dependencies, not just economic dependencies, primarily health-related dependencies including travel bans been lifted, a vaccine for COVID, and treatments for COVID advancing. So there are number of things that are very hard to predict at this stage.

However we’ve seen exports bouncing back with about a billion dollars of exports a month, that run rate would make it possible to put us ahead of last year’s full year export number.

On the production and manufacturing side, I think we’re much better organized to operate even if there were a COVID second wave.

With that in mind, there will need to be much stronger capital formation across industries and that’s where we see a big opportunity for the Stock Exchange. With more companies raising capital through the CSE.  I am positive about our outlook! We have a game plan; we’ve been able to stabilize policy uncertainty which we had for the last few years, with a consistent government in place, good policy and solid public sector private sector engagement, I think we should get back to 5% plus growth.

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BIZnomics Note Pad 0 575

China and India – the second and seventh largest economies in the world (two largest economies in Asia) – are slowing down in 2019. The GDP growth rate in China is expected to be 6.2 percent, down from 6.7 percent in 2018 – the weakest in 3 decades. The GDP growth rate of India is projected at 6.7 percent, down from 7.0 percent in 2018. Chinese policy makers are saddled with trade talks with the US government to remove the recently imposed two way high tariff while Indian policy reforms take a backseat in the backdrop of impending National Elections in June 2019.

British Prime Minister Theresa May suffered a setback as parliament voted against her BREXIT proposal. The loss throws more uncertainty on UK’s plan to leave the EU on March 29. The European Central Bank down grading its economic forecast for the Euro Zone for 2019 and 2020 due to persistent uncertainties and risks in the region, expect inflationary pressures to rise slowly as capacity diminishes.

The World Bank sees darkening prospects for global growth that will slow to 2.9 percent in 2019 in the backdrop of moderating international trade and investment, elevated trade tensions and tightening financial conditions. The World Bank observed that debt vulnerability in low income countries are rising. Debt to GDP ratio for low income countries have climbed and the composition of debt has shifted toward more expensive market based financing. The Bank suggests that these economies should focus on mobilizing domestic resources, strengthening debt and investment management practices, and building resilient macro fiscal frameworks.

Sri Lanka’s official reserves declined to USD 6,142 million by end of January 2019 from USD 6,919 million reported at the end of December 2018. Short term (within 01 year) liabilities on foreign currency assets remain at USD 6,547 million placing net reserve on a negative terrain. Selling rates of major currencies remained under pressure with import demand picking up in mid-February. The selling rate of the US dollar declined from Rs.180.28 on 15th February 2019 to Rs.177.59 a week ago.

US – China trade talks aimed at ending the use of new two way tariff continue in Washington following a no deal in the talks in Beijing during the second week of February. The US President has indicated that the March 01st deadline could be extended for an agreement to be reached. China and US have imposed duties on more than USD 360 million in the two way trade which has shaken the global economy.

The Asian Development Bank (ADB) revealed that the GDP for South East Asia’s 5 major economies – Indonesia, Malaysia, Philippines, Singapore and Thailand – has declined from 5.1 percent in 2017 to 4.8 percent in 2018. The ADB highlights that South East Asia with 650 million people and one of the world’s fastest growing regions, faces several headwinds such as escalating US – China trade tensions and weakening local currencies.

By: Econsult

Daraz: Changing the Way We Shop 0 570

E-commerce was an industry fairly unknown in Sri Lanka. But over time it has slowly made its
way into our houses, showing us the ease of life of ‘shopping online’. The lockdown may have
even channeled it into our front pocket. As crowned retail giants struggled to meet demands
while following COVID19 safety regulations, e-commerce platforms got their time in the
limelight. Online shopping has firmly secured 1 percent of the market share to date, and there is
no doubt it will continue to grow rapidly even as we enter the “new normal”. We spoke to the Managing Director of Daraz.lk, Rakhil Fernando to find out how the industry is evolving in the wake of the pandemic.

How did Daraz face Covid19?
Our first priority was to support the government and really help fight the virus itself. As a group
globally, we invested in deploying testing kits and masks and tried to get it to our respective
governments as soon as possible.We donated 20,000 test kits and 100,000 masks to the Sri Lankan government. Our next goal was to help the e-commerce ecosystem. We were relying on so many small entrepreneurs to build our platform and sell on our platform. The government also needed these kinds of enterprises to restart the economy and keep it from collapsing. So, we really felt this was the area we needed to focus on and invest in.That was the goal behind launching the Seller Stimulus program in May. To further subsidize sellers, we decided not to charge them a commission, while providing them free shipping, and free packaging to help them get their business up and running at no extra cost. We now have about 4,000 SME’s that have come on board the platform within the last 30 days.How is business after the pandemic?
Business is growing tremendously well. Between last year and this year, we grew about 200
percent and we’re looking to grow at least another 150 percent from this year to next year. We
are also looking to exceed our Rs.15 billion in sales this year. We are very excited about
the prospect; COVID19 has really changed the e-commerce landscape in Sri Lanka.

There’s been an increase in the number of people who are willing to shop online, some of whom had little choice but to shop online during the curfew. Initially, they were looking at buying groceries online but now they’ve started buying other things as well. Currently, we have around 100,000 people visiting our site every day as unique visitors and that number keeps growing.

What does Daraz bring to the table?
E-commerce in general has many interesting players. The local e-commerce platform
unfortunately hasn’t been able to expand as much within the past few years. We’re one of the
first companies that has the capacity to sell island-wide. In terms of the items we have on sale
and our reach in terms of where we can deliver, I think it’s really becoming the golden era for e-
commerce in Sri Lanka with regard to the efficiency of the platforms and delivery platforms.
During these times you also see third party logistic companies coming out to provide services to
e-commerce companies during this very critical period. “So it’s an interesting time”. I think it’s
the right time for Daraz to be here and invest in Sri Lanka.

Many new platforms have entered the e-commerce ecosystem, as a market leader do you
see this as a threat?
Not at all. I think, for us, our biggest competitors in the last couple of months in terms of what
has popped up would be the FMCG grocery segment; mainly the likes of Uber and PickMe.
They sell online and get people their groceries in a short period of time. Now what we see, is
that we can do what a lot of our competitors probably find difficult. For an example if you buy a
Rs.1,000 worth bundle, you get a fixed set of vegetables, a set of cooking items or
confectioneries. These platforms sell these bundles because it’s easy for sellers to have a
packed bundle ready to hand over to the Uber or PickMe rider to deliver to the customer. But it
becomes very complex when you want to have a mixed order. When you scale that to 15,000
orders that are very different it becomes very complex because it takes a long time to find the
items, put them together, and make sure the order has the correct items and they aren’t mixed
up. It’s the kind of scale we operate in. We project our orders to reach about 30,000 orders a
day in the next couple of months. So, in that sense, we think that we can provide a more
scalable solution to a vast number of customers looking for different types of products that exist
on e-commerce platforms. Now there’s room for us to exist along with new e-commerce groups
like UberEats and PickMe. But I think we fulfill two very different types of orders, not the type of
customers; the orders we get are actually very different.

Is e-commerce a Colombo based market or has it diversified around the island?
We do around 15,000 orders a day and most of those orders come from out of Colombo.
About 70 percent of the orders come from outside the Colombo district. That’s interesting
because most people think e-commerce is centralized to Colombo but in our experience, there’s
a lot of demand from outside Colombo. Cities like Jaffna, Kandy but also in rural provincial
areas as well. So that’s a good sign, it shows there’s an increasing demand and purchasing
power for people who are looking for the right items, at the best price and happy to use e-
commerce to get them.

What is Daraz doing to integrate e-commerce in rural communities?
We have a concept called “Daraz stores”. We have engaged with about 400 to 500 Branded Daraz stores. These local shopkeepers are our representatives. How this initiative works would be, the shop keeper a village or town level will encourage and get his local shoppers, local customers to order on Daraz. We want to introduce e-commerce to the local community. A lot of people don’t shop online because they’re afraid to give their credit card details or they fear they may not receive the item they purchased online. We look at Daraz stores, as having a local representative, somebody you trust, somebody you deal with every day, they can be the person you trust to help you order online for the first time, so we work with these stores that help us get local customers online. The goods also get delivered to the shop so they know there’s a physical place that they can go to, make a complaint, return the item, and collect it. The advantage is that essentially, right now, the shop is restricted to items they have in store to sell. We make available for the shop to have a million items they can sell and they get a commission of 10 to 15 percent for the sale which is a decent commission.

Do Sri Lankan buyers get internationally listed products?
About 30 percent of the products on our platform are foreign sellers. Daraz and Alibaba Express are connected to the same supply network. We list some of those sellers also on our platform. We’re looking to increase foreign goods to create a bit more variety, especially now that there’s the limitation of importation of goods and available products. We want to make sure that there’s a good assortment still available on the site. But overall the site now lists about a million products of about 700,000 local sellers.

Do Sri Lankan sellers get to list their products internationally?
Not at the moment. Sri Lankans can sell on Alibaba as a B2B platform. But direct customer, Daraz is still a local base. It’s mainly only local customers that can order and get products delivered. That’s something we’re looking to grow and maybe do in the next couple of years.

What is the future of e-commerce in Sri Lanka?
It’s an incredibly bright future for e-commerce in Sri Lanka. I think over these weeks e-
commerce has really evolved and people have looked to online channels get all their shopping
needs. Right now, the demand is there but the sellers are still catching up and it’s up to a
platform like Daraz to really come through in terms of offering products, in terms of the service
level, and in terms of the technology. Now we see e-commerce growing by 3 percent in the next
2 to 4 years. So the potential should be 4 times the size we see it right now in the next 2 years.
That’s encouraging, that’s a huge opportunity. But you need platforms like Daraz to really set
the standards and be able to sell to everyone in the country.

We are trying to reach all the customers in the country because everyone deserves to have any product they want, not just the products that are available on the high street. We want to reach out to the whole island and make e-commerce accessible to anyone, anywhere in the island”.