Sri Lanka, a gem hidden among too much pessimism

Rainer Michael Preiss 
Pic by Nimalsiri Edirisinghe

• Global investment advisor Preiss says Lankan stocks offer attractive valuations
• Points out Lankan stock market has negative correlation with U.S. equities 
• “There are challenges, but the sentiment is too negative”- Preiss
• Says current global economic environment favourable to emerging markets 

By Indika Sakalasooriya

The current global low interest rate environment, ongoing trade tensions and recession fears make Sri Lanka a brighter spot on global investors’ radar, particularly with the attractive valuations offered by the country’s stock market and its negative correlation with the U.S. equities.

 According to investment advisor and asset management strategist, Rainer Michael Preiss, who is also a board director of Colombo-based Ceylon Asset Management, frontier markets like Sri Lanka could benefit from the current global economic turmoil. 

 The International Monetary Fund (IMF) last month cut global growth projections for this year and the next and reiterated its previous position that the world economy was at a “delicate moment,” amid trade tensions between the U.S. and other countries.

 The U.S. Federal Reserve lowered interest rate by a quarter-point for the first time in more than a decade to bolster the world’s largest economy amid early signs of global slowdown.
 Also, with Boris Johnson becoming the new Prime Minister of the United Kingdom, chances remain high for a hard Brexit.

 It is in this global confusion, Preiss maintains that Sri Lanka, at least for a limited time, offers some respite to global investors with its attractive valuations and limited links to the global economy, though the island nation’s stock market is marred with too much pessimism. 

 “Sri Lanka is a hidden gem among too much pessimism. That’s how I would like to put it,” Preiss told Mirror Business during a recent interview in Colombo.

 “My personal opinion about Sri Lanka is that now we have reached a point of maximum pessimism. There are challenges, but the sentiment is too negative. 

 “Nobody wants to talk about the stock market,” he said.

 Sri Lanka is still recovering from the severe blows dealt by a constitutional crisis last October and the April 21 bomb attacks that paralyzed the country’s booming tourism industry. 

 Backing his claim, Preiss pointed out that Sri Lankan stocks now offer a price-to- earnings ratio of around 9 percent—similar levels that prevailed after the end of civil war 10 years ago.
 Also, he noted that Sri Lankan stocks have a negative correlation to the U.S. equities, which are now at all-time high with other Western stock markets at multi-year highs. 
 “According to our data, the Sri Lankan stock market is negatively correlated to the U.S. — a 0.5 percent negative correlation. The Indian stock market is positively correlated.
“Investors have some diversification benefit by investing in the Sri Lankan stock market.”

 He also pointed out that the belief that the U.S. interest rate cycle has peaked after the longest economic cycle in the history, has been good for frontier markets like Sri Lanka, historically.
 “Of course the real question is whether this is just one off (July 31 Fed rate cut) or are we entering into a reduction cycle.”

 “With lower interest rates in America, we might potentially see some investment flows to frontier markets such as Sri Lanka.”

 When asked about the possible risks stemming from political uncertainties, specially in light of the impending elections, Preiss downplayed it saying that the perception that political risk is extremely high is a contrarian indicator.

 “When things go from terribly awful to just awful, investors tend to make good returns.  This is may be the level we are currently in.

 “Yes election is the big question. Most probably because the sentiment is so bad, may be it can only improve. Going into the elections, hopefully there is more meaningful improvement in the political situation. That’s the way I see it.”

 Reiterating his remarks regarding too much pessimism, Preiss pointed out that Sri Lankan sovereign bonds, which were of higher quality than of Pakistan and Mongolia, are now trading below them despite Sri Lanka being a better credit risk than Pakistan and Mongolia.

 “That to me is a sign that sentiment over Sri Lanka is too negative. Because Sri Lanka is a sizable and considerably diversified economy compared to those two.”

 Meanwhile, he pointed out that Sri Lanka could benefit from the ongoing trade tensions between the U.S. and China if the country was able to tap the opportunity with right policies. 
 “China is seeing a lot of outflows due to China-US trade wars. America is looking to rebalance its supply chains. One country hugely benefitting from that is Vietnam. From Vietnam there could be a trickledown effect as Vietnam is now experiencing capacity constraints. 

 “Over time, Hambantota port will be very strategic.  It’s a huge opportunity,” he said.