Stock market aims high for 2024

Colombo Stock Exchange gears up for a promising year amidst economic revival

Colombo Stock Exchange Chairman Dilshan Wirasekara

The stock market is a critical pillar of any nation’s economy, providing companies with a platform to raise capital by issuing shares to investors. This process fuels business expansion, fosters investment in new ventures and ultimately drives economic growth. 
For Sri Lanka, a country actively pursuing economic development and expansion, a robust and efficient stock market is essential, particularly given its current economic trajectory.
According to Colombo Stock Exchange (CSE) Chairman Dilshan Wirasekara, the outlook for 2024 is promising, with the rebound in economic activity positively impacting the capital markets. 
In an in-depth interview, Wirasekara shares comprehensive insights on efforts taken to improve activities, key areas of focus and where the stock market is heading.
Following are the excerpts from the interview:

Could you give an overview of the current market landscape and discuss the CSE’s overall outlook for the year 2024?

We believe the overall outlook of the CSE, for the year 2024 to be a positive one, which I think mirrors the outlook for the country as a whole. There is a significant recovery in economic activity that we see, which is now translating into the capital markets and specifically to the CSE.
Notably, the turnover levels of the exchange have experienced a significant uptick from what it was at the beginning of the year. An increase from its daily average turnover (ADT) of around Rs.715 million in January, to the current comparatively more stable Rs.1.8 billion ADT in March.

I would like to delve into why performance wasn’t as what it used to be, as well as why I believe it will be better this time around. The first and arguably most significant reason being because the country is currently in a default status. As it is in default and awaiting finalisation of external creditors for the debt restructuring, we are seeing very little foreign activity and therefore turnover is still dominated by domestic activity. As of March 28, we are currently at 74.91 percent local, 25.09 percent foreign participation to turnover. A stark shift from previous years such as in 2018, where we were able to witness a 50-50 foreign to local contribution to the turnover. 

We are optimistic that as the external debt restructuring is forecasted to be finalised before June, we will then be able to shed our default status. Portfolio funds can then allocate investments into Sri Lanka and that will drive an increase of foreign activity from its current status of 25.09 percent. 

Second, the domestic economy has had a negative growth of 7.8 percent in 2022, followed by a negative growth of 2.3 percent for 2023. However, the last quarter for 2023 shows 4.5 percent growth for that quarter. Therefore, looking ahead to 2024, we are optimistic that a growth of 3-5 percent will be achieved by the economy. That will undoubtedly result in a lot more activity.

Next, interest rates have been prohibitive for investments. Previously, fixed income yields were over 20 percent and people tend to avoid risky asset classes like equity, regardless of whether the returns could be rewarding. The Central Bank has reduced policy rates and as the AWPLR downward trajectory appears to be coming closer to 10 percent, which will primarily expect to stimulate credit growth; ultimately, people will consider investing in the stock market due to low interest rates. 

Finally, the performance of the current market landscape hasn’t been very impressive since, the market yet remains undervalued. The current market PE is 10.27 and the price-to-book value is at 1.02. However, historically we have had our market trade at multiples of 17 times price earnings, one and a half times book value. These are all the reasons that would then further result in the valuations being rerated.
Overall, we are quite optimistic that activity and turnover will increase driving yields and the market will perform well for the year 2024 as economic conditions continue to improve.

Do you foresee a demand for capital raising via the stock market in 2024?

Yes, there is a strong anticipation of increased demand for capital raising via the stock market in 2024. Several factors contribute to this optimistic outlook:
Conducive market conditions: The market environment is seen as favourable for companies to raise capital. With expectations of improved valuations, companies can achieve reasonable multiples when raising equity, making it an opportune time for capital infusion.

Investor appetite: As investor activity increases, there is a growing appetite for initial public offerings (IPOs). This increased demand from investors creates a conducive environment for companies seeking to raise capital through the stock market.

Introduction of new products: The introduction of new financial instruments such as sustainable bonds, infrastructure bonds and sukuks provides alternative fundraising options for organisations. This diversification of offerings is expected to attract companies looking to capitalise on these new instruments, thereby driving more listings and investor activity.
Broad basing via introducing multiple listing boards: The CSE offers three listing boards—the Main Board, Diri Savi Board and Empower Board— catering to local corporations of all sizes. These boards serve as gateways for companies to obtain listings and access capital markets, providing a range of options to suit different company profiles and capital-raising needs. 

Further, the CSE has introduced the Catalist Board exclusively aimed at accommodating listings of state-owned enterprises anticipated in the future. Additionally, to assist foreign-listed companies seeking dual listing status in Sri Lanka, the CSE has established a specialised board called the Multi Currency Board.
The CSE has strengthened its listing function by allocating resources with focus on issuer relations activities, including actively engaging with companies in creating awareness and addressing misconceptions and streamlining its processes to facilitate listings. 

Is there opportunity to raise capital in foreign currency for local companies?

Yes, there is indeed an opportunity for local companies to raise capital in foreign currency through the CSE. The framework established by the CSE allows listed entities to issue foreign currency-denominated equity, subject to certain eligibility criteria and regulatory requirements.

One of the key eligibility requirements is that 50 percent of the company’s revenues should be in the form of foreign currency, with a minimum threshold of US $ 5 million over a period of three years. Additionally, these issuances are classified as a different class of shares and are available exclusively to non-residents in the country.
Furthermore, companies that raise foreign currency through these issuances are required to allocate 40 percent of the proceeds to local requirements, while the remaining 60 percent can be invested outside Sri Lanka.

Despite the potential benefits of such listings, including access to a broader pool of investors and diversification of funding sources, there have been no such listings so far. This can be attributed to various factors, including the prevailing economic conditions, exchange rate volatility and regulatory restrictions.

However, there is optimism within the CSE and the business community that these listings will gain traction in the future. Improvements in the local and global economic climate, along with the increasing demand for capital among exporters and other eligible entities, are expected to drive interest in foreign currency-denominated equity issuances.
As conditions continue to evolve and stabilise, it is anticipated that more local companies will explore the opportunity to raise capital in foreign currency through the CSE, contributing to the growth and development of Sri Lanka’s capital markets.

The CSE has partnered with USAID to encourage SMEs to raise capital via the stock market. What is the outcome?

The partnership between the CSE and USAID CATALYZE Private Sector Development Activity (PSD) represents a significant initiative aimed at empowering the small and medium-sized enterprises (SMEs) to raise capital through the stock market. This collaboration seeks to raise awareness among the SMEs about the opportunities available through obtaining a listing on either the Diri Savi or Empower Board of the CSE.

To achieve this objective, a series of islandwide issuer forums have been organised, with the most recent event held in Jaffna. These forums serve as platforms for educating potential issuers about the benefits and processes involved in listing on the CSE. 

Currently, some investment bankers/corporate finance advisors are partnered with PSD, playing a crucial role in aiding SMEs’ listing process. Moreover, as registered sponsors with the CSE, these investment bankers/corporate finance advisors are committed to providing ongoing support to SMEs post-listing, facilitating their transition and ensuring their continued success. This hand-holding process extends for a period of two years post listing, during which these advisors will offer guidance and assistance to listed entities as they navigate the complexities of being a publicly traded company.

Overall, this partnership depicts the commitment of both the CSE and USAID to foster the development of the SMEs and promote inclusive economic growth. By providing the SMEs with the necessary resources, guidance and incentives, this initiative aims to empower them to harness the capital markets as a means of realising their full potential and contributing to the broader prosperity of Sri Lanka’s economy.

The CSE has been aggressively promoting financial literacy among various segments. What are your views on these feats? 

I believe the fact that financial literacy remains at a relatively poor level in the country is a perennial challenge of developing nations. Financial literacy was at 38 percent few years ago and is currently at 54 percent. Therefore, while the overall number has improved, it is still very much under the benchmark literacy rate that developed nations or medium developed nations are achieving. There is a benchmark that any developed nation is expected to maintain a financial literacy rate of 85 percent. This proves that there is a direct correlation between financial literacy and essentially achieving the ‘developed’ status in a country as well. 

The CSE as an exchange is very passionate about increasing the financial literacy levels of Sri Lanka on a national level. We conduct various educational programmes to ensure that not just investors but the public is financially literate from a very grassroots level. 

The CSE, in collaboration with the Securities and Exchange Commission of Sri Lanka (SEC), organised seven investor forums in the year 2023, with the aim of educating the business community of each of those districts, providing valuable insights to both potential and existing investors in the region. We have projected the same for this year as well, two forums of which we have already concluded in Vavuniya and Dambulla. The other five forums are set to take place within the coming months. In addition to these, we have a strong branch network working diligently to promote financial literacy across all parts of the country, including rural areas and we have successfully completed 310 branch education programmes as well as 80 online forums over the past year. 

We have had discussions with the Education Ministry and have successfully come to an agreement to include financial literacy-related subject matter into the 2025 curriculum. This will guarantee a significant impact on students graduating from secondary education, as even though they may not attend university, they will still possess a basic knowledge of capital markets and its products. The current O/L syllabus does include a very basic introduction to capital markets under the ‘Commerce’ elective subject as well as for the A/Ls under the commerce stream. We proposed that the syllabus revision for 2025 would include the same for students from grades six to nine, to ensure they are financially literate before they reach the ordinary levels. 

Since the establishment of the 100 Capital Market Clubs last year, a collaborative effort involving the Presidential Secretariat, Education Ministry, SEC and CSE, we have also set about organising an inter-school quiz competition, the first of its kind in Sri Lanka.
In addition to this, we have also begun hosting an inter-university quiz competition called the ‘Varsity Battles’; this is the second consecutive year we host it with the intention of educating state university students on capital markets.

What are the efforts the CSE has taken to broaden the local investor base while enhancing investor confidence and protection?

Apart from the many educational programmes, investor forums and issuer forums organised, as I mentioned earlier, we also host quiz competitions as a more dynamic way to bring in more potential investors. The CSE is in the process of initiating the sixth edition of Sri Lanka’s only capital market quiz, CSE Masterminds 2024, an event that in 2023 attracted the participation of over 77 teams with a wide representation of corporates and private companies, state institutions and other capital market stakeholders from around the country. 

In terms of enhancing investor confidence and protection, let me begin by mentioning that the overall number of CDS accounts have increased. We were at 930,022 CDS accounts as of December 31, 2023 and we currently have 933,592 CDS accounts. We have a CSE mobile app to enable potential investors to conveniently open CDS accounts, have easy access to incremental market data, gain access to trading via stockbrokers and make electronic settlements using the banking network. The investing public can expect a new upgraded version of the mobile app with new features to follow. What we are looking for is that these accounts will be actively trading. As I mentioned earlier, we are conducting various training programmes, a number of investor forums, university and school level programmes and foreign road shows, to encourage investors to trade the market.

Investor protection is something that the CSE takes very seriously. We have made several amendments to the listing rules as per requirements of the new SEC Act and as a result, all safeguards in place for investor protection have got strengthened as well. Insider trading as well as other market offences and unethical practices now have far more ramifications for those who breach the rules. We are taking a fairly strict approach for compliance with these. 

We’ve also strengthened the listing rules including, ensuring timely disclosures as well as publishing of accounts, among others, which is another measure to uphold investor protection. We are committed to enforcing these rules and we hope that then the public will have confidence that all listed companies will conform to these rules. 

While the CSE has Market Surveillance, Broker Supervision and Listed Entity Compliance departments, there is a separate regulator as well that will further safeguard all investor rights. The new Dispute Resolution Committee (DRC) structure, an independent committee, is established completely independent of the secretariat to ensure impartiality throughout the entire grievance process. Therefore, when someone has a complaint, there is a process now that ends up with an independent dispute resolution committee making it completely separate from the CSE and SEC. Therefore, any complaints are run through a process that culminates entirely independent from the CSE and SEC.

In the past years, the CSE witnessed foreign participation of around 45 percent. Presently, it’s at 25 percent. What plans does the CSE have to attract foreign participation?

Due to the political and economic turmoil over the past four years, there has been a notable decline in foreign activity. Sri Lanka’s current status as a country in default has also led to minimal portfolio allocations. The government has expressed plans to complete the debt restructuring by June, which would ideally result in the removal of the default status. 
We are confident that on achievement of that, portfolio allocations will restart, which will result in the foreign activity going back from the current outflow of 7,918.2 to the elevated levels that we have witnessed historically. 

We have continued to engage with foreign investors through various roadshows and I was able to represent the CSE as the national stock exchange of Sri Lanka as part of the government delegation to foreign countries to strike up conversations with potential stakeholders. The CSE conducted forums abroad in India, the UK and Dubai and was part of the delegation to New York and Davos along with His Excellency President Ranil Wickremesinghe. 

We have managed to keep engagement with foreign investors throughout these difficult times for the country. What the investing public needs to understand is that these inflows and outflows are all part of the investment cycle. There have been years where we have experienced major outflows and experienced complete turnarounds that offset those negative numbers.

The CSE is also contemplating the possibility of conducting regional investor forums to try and generate interest back in our market once again.
Beyond the work that the CSE does in terms of attracting foreign participation, market intermediaries have their own dialogues and programmes as well, which further contribute to educating their foreign clientele and we sincerely encourage that.