Hyper-leap to a vibrant equity market 3 1279

 

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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Traffic Jams 0 1410

Traffic-Jams-in-Sri-Lanka

BY T.V. PERERA

At the turn of the century, chaos and anarchy ruled the streets of Colombo, and that was not because city traffic was a mess then as it is now. Everyone will agree that traffic in Colombo has worsened in recent times; slow moving on all main trunk roads into the city not only during rush hours but also at normal times, and getting worse in the heart of Colombo. If Colombo is to accommodate the growing number of vehicles on its roads, the road network would have to be increased by three-fold in the not too distant future.

Colloquially known as traffic jams or traffic snarlups, traffic congestion is a transport condition characterized by slow speeds, longer trip times and increased vehicular queueing. When traffic is great, interaction between vehicles slows the speed of the traffic stream which results in congestion. Likewise, as demand approaches the capacity of a
road or its intersections, extreme congestion sets in. Traffic congestion also occurs when a column of traffic generates demand for space greater than that available, when vehicles are fully stopped for periods of time and also due to incidents such as a crash or roadworks which may reduce road capacity below normal levels.
According to the Time magazine, Sao Paulo in Brazil has the world’s worst daily traffic jam with over 300 kms of cummulative queues around the city during the evening rush hours. Last year, Mumbai was the worst city for traffic chaos where drivers can expect to spend an average 65% extra time stuck in a gridlock.

TRAFFIC-JAMS--BiZnomics   vc

Individual incidents such as accidents or even a single car braking heavily could cause congestion, yet traffic research still cannot fully predict under which conditions a traffic jam as opposed to heavy but smoothly flowing traffic may suddenly occur. Of the over 4.4 million vehicles registered, around 2.7 million are on the roads causing the Colombo roads to be full with traffic congestion as an average 250,000 vehicles made up of 15,000 buses, 10,000 trucks and 225,000 private vehicles enter the city daily.

A man-made menace, traffic congestion has a number of negative effects such as being detrimental to the development of a country, killing productivity, and is a national waste. Not only does productivity and the sense of well-being go astray, it also leaves people angry, exhausted and depressed. To get stuck in a traffic jam of stress is really frustrating. Vehicle numbers increasing without any plan to expand road conditions and manage road discipline, is plainly visible.

The increasing vehicles contribute to long lines on the road yet no one seems to be interested in taking any positive and effective action other than the police which is responsible for controlling this mess. Successive governments have indicated intentions of taking corrective measures but nothing has been done to control road traffic which besides being annoying, is costing us billions of rupees and a massive financial and manhour loss as a result of no vehicular control in the Greater Colombo areas. Statistics reveal that there are 130 vehicles per 1000 people out of which 66% are motor cycles while three-wheelers and cars make up 45 vehicles per 1000 people. Very soon the number of vehicles on the road could grow to 5 million and there will be 250 vehicles per every 1000 persons which may concentrate around the city. This is contrary to the country’s needs of fewer vehicles carrying more people.

Cont..
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Circular Economies: Is Sri Lanka’s Waste Crisis a Wasted Opportunity 0 621

Circular-Economies-Is-Sri-Lanka’s-Waste-Crisis-a-Wasted-Opportunity-1

 

Sri Lanka is currently in the midst of a waste crisis with landfills running out of space and the costs of disposal spiralling rapidly. A recent report by the WWF named Sri Lanka as the fifth largest contributor to marine plastic pollution and the level of recycling in Sri Lanka in particular for plastics falls well below global averages.

Circular-Economies-Is-Sri-Lanka’s-Waste-Crisis-a-Wasted-Opportunity-2

 

The Sri Lankan economy on the other hand, continues to suffer from a significant balance of trade deficit and a weakening rupee in part due to imports for raw materials such as plastics, aluminium, paper/cardboard and electronics. Finding a way to increase the domestic ability to sort and recycle these materials for re-use in a circular way may in fact provide a solution for both the environment and the economy.

Circular-Economies-Is-Sri-Lanka’s-Waste-Crisis-a-Wasted-Opportunity

 

A linear economy, which typifies most products and materials here in Sri Lanka, is one whereby products are manufactured, used and then disposed of as waste. A circular economy by contrast, is one that aims to eliminate waste through the continual use of resources by reusing, repairing, refurbishing, remanufacturing and recycling raw materials and products at the end of their usable lives. This therefore closes the loop on the manufacturing process thereby reducing the need for new materials.

 

Circular-Economies-Is-Sri-Lanka’s-Waste-Crisis-a-Wasted-Opportunity-2

The waste problem is not just limited to the Sri Lankan economy as materials such as plastics do not biodegrade and therefore will continue to exist until a solution is found. Plastic breaks down into what is known as microplastics after some time which significantly harms the environment as animals ingest this and toxins from the material itself seep into the water table. Recent studies suggest that we are ingesting the equivalent of one credit card every week. The health impacts of the plastic epidemic are likely to grow significantly.

Cont..

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