Sri Lankan Equities To Grow 25% Next 5-years

Sri Lankan equity market returns will grow 25 percent annually during the 5-years up to 2020, and the country will be flooded with foreign capital as Sri Lanka will reach investment grade status, according to an experience fund manager.According to Dulindra Fernando, the Sri Lankan economy is going to see her best 5-years since independence from 2015 through 2020, and said one could ill afford to stay out of the stock market as the 5-years ahead will never be repeated.“We expect the stock market to perform at an average of 25 percent per annum over the next 5years,” he said.According to Fernando, the current phase of super returns in the Colombo bourse will most likely be ended after 2020, as the The super returns that are currently offered by the bourse will be over by 2020 market reaches its maturity.

“The super returns that are currently offered by the bourse will be over by 2020 as the Colombo Stock Exchange (CSE) will reach maturity as a market by then.Returns could also be lower due to the high level of foreign participation. Further, Sri Lankan economy will also slow down after the rapid growth in the preceding 5-years which will also slow down the growth of listed entities,” explained Fernando who initiated the country’s first dollar bond fund.
Colombo Stock Exchange (CSE) benchmark price index, the All Share Price Index (ASPI) returns have grown by 23 percent annually during the last 5-years and the market is trading at PE multiple of 19.52 which is considered over-valued.

At 25 percent annual return, an investor who invests in Sri Lankan equities today will be able to see his investment tripling in 5-years.Fernando who is also the Ceylon Asset Management Company Limited (CAM) Managing Director urged retailers to get in to Lankan equities now than later as the opportunity is now available.Fernando also expects Sri Lanka to be upgraded from the current BB- (by Fitch) to the investment grade rating of BBB by 2020.
Sri Lanka’s current under-investment grade rating hinders most international funds, emerging market funds, pension funds etc from investing in Sri Lankan equities and bonds as they can only invest in BBB rated instruments.

“Once you get to BBB, most pension funds (US) will invest with you. Sri Lanka will be flooded with money (capital). After you go to BBB, you won’t get double digit returns,” he explained.Meanwhile the emerging market investment advisor and CAM Director, Michael Preiss however told most of the money is made during the transition period from under-investment grade to the investment grade. This is because of the relatively higher interest incomes and potentially higher capital gains an investor could make during this period.

Further, an investment grade rating will pressure Sri Lankan bond yields down further while the prices pushing up benefits  future dollar bond issuers.
At present, US $ 7.0 billion worth of Sri Lankan issued dollar bonds; sovereign, bank and corporate bonds are listed on the Singapore Exchange.