BlackRock boost for Sri Lanka

(DailyFT- June 02, 2014) By Nisthar Cassim in London

  • World’s largest fund manager of $ 4.4 trillion worth of assets tells CSE-SEC Investor Forum in London host of positive factors make Sri Lanka a compelling place to invest and time is now
  • Points to Sri Lanka’s long-term prospects and the economic growth story as the most attractive among frontier markets
  • Finds valuations in SL quite attractive but lack of liquidity remains a challenge

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The world’s largest fund manager BlackRock on Friday declared that a host of positive factors makes Sri Lanka a compelling place to invest and “now is an excellent time” to do so.
“It is only in the past 18 months that we have put serious capital to work (in Sri Lanka) and that is why I would say now is an excellent time to invest in Sri Lanka. I am very positive about the outlook of the Sri Lankan economy. I believe Sri Lanka’s long term prospects are among the most attractive in the frontier universe. Therefore we view Sri Lanka as a compelling place to invest on a relative basis as well as on an absolute basis,” Blackrock’s Fund Manager and Member of the Emerging Markets Specialists Team Gordon Fraser told the Invest Sri Lanka Forum in London held at the iconic Savoy Hotel.

“Sri Lanka is a large overweight on our funds,” added the executive of BlackRock, which has $ 4.4 trillion worth of assets under management across equity, fixed income, cash management, alternative investment, real estate and advisory strategies.

Headquartered in the New York City, US, BlackRock as of 31 March 2014 had around 11,500 employees in over 30 countries and a major presence in key global markets, including North and South America, Europe, Asia, Australia and the Middle East and Africa.

“We view Sri Lanka as a compelling place to invest on a relative basis as well as on an absolute basis – BlackRock’s Fund Manager and Member of the Emerging Markets Specialists Team Gordon Fraser in his address at the Sri Lanka Investor Forum in London”

Fraser’s presentation was a key highlight at the well-attended Investor Forum on Friday organised by the Colombo Stock Exchange and the Securities and Exchange Commission in partnership with the London Stock Exchange and Bloomberg.

Via several of its funds BlackRock has investments in a select group of top blue chips in Sri Lanka, including John Keells Holdings (JKH). Noting that he has a very enjoyable job as he visits countries with frontier and emerging capital markets, Fraser said: “Of all the countries that I have visited, and I say this to anyone who asks me, Sri Lanka is my favourite.”

That comment laid the platform for what was an objective assessment of Sri Lanka and its capital market, which the forum endeavoured to promote among 150 UK-based fund managers, investment banks and investors.

The Sri Lankan delegation comprising over 50 attended the event with Central Bank Governor Nivard Cabraal as the Chief Guest. Over 20 senior management personnel represented nine listed blue chips – John Keells Holdings PLC, Commercial Bank of Ceylon PLC, Dialog Axiata PLC, Hayleys PLC, Access Engineering PLC, People’s Leasing & Finance PLC, Tokyo Cement PLC, Laugfs Gas PLC and MTD Walkers PLC – who had a full day of one-on-one prescheduled meetings with UK-based fund managers. Around 20 executives from Sri Lankan stockbroking firms were also present.
Cabraal as well as Sri Lanka’s High Commissioner in the UK Dr. Chris Nonis also addressed the forum, in addition to participating in a panel discussion which included SEC Chairman Dr. Nalaka Godahewa and CSE Chairman Krishan Balendra as well.

Fraser in his presentation also said in his opinion the best economic growth story of Sri Lanka was very supply side-led, with new infrastructure which did not exist before.
“Sri Lanka is adding port capacity to leverage its position on East-West shipment routes, developing itself into a transhipment hub, and working on more efficient and powerful power capacity – these very simple improvements will have a very large impact on the productive potential of the economy,” the BlackRock executive said.

“When the supply side potential is combined with a favourable economic cycle, it is the best time to invest. After a few years of slow credit growth and lower GDP growth and the necessary depreciation of the rupee, Sri Lanka looks set for an upswing,” he added.

Fraser however emphasised that GDP growth was not the whole story but there were a number of academic studies that show low correlation between GDP growth and market performance, and some even show negative correlation.

“However, to create equity performance, what we really need is focus of companies on shareholder returns, and here I am very pleased to say Sri Lanka scores very well with a strong corporate culture and a focus on investors,” he said.

The BlackRock executive recalled that the last time he visited Sri Lanka he had 100% fulfilment of his meeting requests. This he said has never happened before. “Disclosure is generally strong and corporates take their CSR very seriously. I would not normally call out on a company, but John Keells’ 20-page report in its Annual Report on environmental impact and business ethics is quite impressive in emerging markets,” Fraser told the London forum.

BlackRock is also finding valuations in Sri Lanka quite attractive. Citing an example, he said banks were a very good prospect. “In most other emerging markets you will find that banks have been a good way to get exposure to the economic development of a country over time, so long as they are run prudently. In Sri Lanka, I think the investment case is even more compelling,” Fraser emphasised. “Banks in Sri Lanka trade at cheap multiples. Therefore in our opinion, banks are a cheap way to get exposure to Sri Lanka’s development,” he added.

Focusing on some of the challenges Sri Lanka’s capital market faces, Fraser said the country has some large twin deficits, and it must be careful to avoid the trap that many other emerging markets have fallen into by becoming dependent on foreign savings rather than domestic savings to grow.

He said the more pressing issue for overseas fund managers was liquidity. “Despite a plethora of theoretically interesting investments, the list of companies that offer sufficient ownership is fairly restrictive. Liquidity however will improve over time and anything that can be done in this regard will be very welcome,” Fraser added.

He said Sri Lanka is certainly less liquid, compared to some of the other frontier markets such as Saudi Arabia, Nigeria, Pakistan and even Vietnam, whilst Sri Lanka is also a little more expensive on earnings multiples than some of these other markets.

“However, I believe that the long-term prospects are among the most attractive in the frontier universe. Therefore we view Sri Lanka as a compelling place to invest on a relative basis but also on an absolute basis and consequently Sri Lanka is a large overweight on our funds,” BlackRock’s Fraser emphasised.

At the Forum for an in-depth perspective on the capital markets, Director & Country Head – Sri Lanka, Copal Amba (A Moody’s Subsidiary) Chanakya Dissanayake made a country presentation whilst CSE Director Vajira Kulatilaka made a presentation on the debt market.

The London event was part of a concerted exercise initiated in 2013 to promote capital market opportunities in post-war Sri Lanka. Similar investor forums were held in Mumbai, Dubai and Hong Kong in 2013 and one in Singapore early this year.

Foreign inflows to the Colombo stock market hit a record last two years at Rs. 61 billion whilst in 2014 year-to-date it has been Rs. 2 billion recovering after a net outflow situation in late April. The Colombo market has offered over 6% return year-to-date. The year 2013 saw a gain of 5% return ending two years of negative return in 2011 and 2012.