An Insight Into The Sri Lanka Stock Market

Interviewee : Imtiaz Buhardeen; Interviewer : Dilusha Gamage;
Date of Interview : 08/05/2021

List of Acronyms : MP = Imtiaz Buhardeen, IN = Interviewer

IN:

Despite the unstable nature of the stock market, what made you get into investing?

IB:

I had a liking towards the stock market since my younger days. In the 1980’s, I used to follow the foreign markets and since then I wanted to start investing. Then around 1985, I started investing and since then I have accumulated 35 years of experience in investing. For about 8-9 years while I was in Singapore, I was not active in the Sri Lankan market but I still managed to be active in the foreign markets (Singapore, America, etc.). Although I missed the Bull Run in 2009-2010, after coming back to Sri Lanka in 2011, I immediately started building my portfolio regardless of profits. So, for the last 9 years I have been building my portfolio from the money that I earned abroad. After COVID, the market started booming during which thanks to my extensive portfolio I was able to recuperate the losses I made for the last 10 years.

IN:

Will the aggressive depreciation of the rupee affect the stock market negatively?

IB:

For listed companies, I don’t think it would be a negative because most of our listed companies are export & tourism related. I would say that the depreciation is good for the companies in the stock market. Mainly, the import bills were targeted at oil, machinery, gas, and tiles which do not impact the stock market massively. Companies that are listed in the stock market in the field of manufacturing, exporting and so on are making reasonable profits from the rupee depreciation. Foreigners too, have been looking at the proper depreciation of the currency in order to enter the market. With the rupee being 200, it is a good time for foreigners to invest in our stock market. But I do not think that the depreciation of the rupee will continue for long as the government will take measures especially due to the debt situation. There are many rumors going around that we might default but I don’t think so since Sri Lanka has never defaulted. Rating agencies were also giving us negative ratings from time to time but now even the World Bank has given a positive outlook for Sri Lanka. Overall, I also have a positive outlook for the market except for the tourism industry due to the ongoing pandemic but once that settles, it should shed a positive light on the listed companies again. I still don’t think that most of the companies are affected, for instance the garment industry in spite of imports still have more value added on the exports. Same goes for the tea export and other manufacturing sectors. Overall, as for the economy, there is a negative impact with rising costs of living and so on. But for your question, no, the listed companies are not affected by depreciation as many of them have branched out overseas thereby having a positive outlook on their returns. Even banks are not affected by the depreciation. Overall, I think listed companies can enjoy this situation.

IN:

In order to bring back the Colombo Stock Exchange to profitability, do we need the foreign investors?

IB:

Definitely, we need foreign investors to come back. As you said, for the last two years’ foreigners have been net sellers. Last year we had about over 52 billion rupees going out whereas this year about 20 billion have gone out. One reason is that foreign investors were worried about the Sri Lanka defaulting on its loans and the rating agencies giving a negative rating. The next reason was because of the COVID situation many foreign investors had a lot of redemptions in their funds and not just in Sri Lanka but in the entire region a lot of foreign selling was taking place. For the short term, they have left but I can see them coming back once the country and the currency settles down. They can also see that the market liquidity has increased and since more companies are being listed, I am sure that the foreign investors are going to come back in a major way. And very soon we will be able to write off all the outflows and get into a positive light in about a year’s time.

IN:

Do we need to wait for the currency to depreciate further in order for the foreign investors to come back?

IB:

I don’t think so because even for foreigners with big funds the government has provided a fixed rate on which they could take back their money in 3 years. Thereby, reducing the risks associated with big funds. But for smaller funds who waited for the depreciation may lose on capital gains in the market if they wait for too long. Last year, in May, our index was about 4000-4200 then it went up to about 9000 and now we are 7200-7300. As you can see stocks have increased by 100%-200% and foreign investors have lost out a lot. So, hopefully before it’s too late they will come back.

IN:

So it won’t be long until the foreign investors come back and cast a positive light on our stock market?

IB:

Yes, true. But the locals have carried through without the foreigners as the locals know that the valuation is good and they have the trust and belief in the companies and the economy here. So, I feel for another 5-6 months, we can continue without a problem but when they, the foreign investors, do come back, they would have to pay a premium.

IN:

In early January 2021, there was a circular targeting brokers which wiped off 800 billion of market cap. What do you think that the CSE and SEC could have done differently in issuing this circular?

IB:

This is a tricky question to answer but I think they could have managed it better. The SEC has the right to ask for information from the stockholders but I do not know if there is protocol stating that they should do so via the CSE. When I spoke to a few stock brokers regarding this, they mainly complained about the details requested in the letter such as how much they have bought, how much is outstanding, and so on. Many brokers didn’t like to provide the information as this information is something they provide to their core members. If the request had come directly from the SEC, it would have been better as it is more confidential. Once the letter was leaked out into social media, there was panic and even the newcomers that came in felt insecure. This is a routine practice of the CSE although it was managed badly. The letter sent a ripple effect into the market that was touching almost 9000 points and turnover of 187 billion in January which was almost 40-50% of the previous year’s turnover. It has taken almost 6 months and we are still 1600-1700 points shy of January. While it’s taking time, I hope in another month or two, we will bounce back to where we were in January.

 

In the future if the CSE/SEC wants something of this nature, they should provide the message in an adequate manner with plenty of time for brokers to understand what is been requested. During the previous run up to the 9000 points, we needed a few corrections but we never received any. So, this was another reason for people to take out the profits which in turn aggravated the problem. If they have had managed the correction well and the letter wasn’t leaked, our market would have been at 10000-11000 points by now. Now, we need to recoup what we have lost before going forward.

IN:

What advice would you give the regulators to avoid such a situation in the future?

IB:

As many stock brokers and their clients may tend to panic at seeing official letters from the SEC for a small issue, it would have been better if the regulators have directly called the people at fault and spoken to them frankly. In other words, regulators could have been more diplomatic in their approach.

IN:

How has the lack of initiatives (demutualization, short-selling, Delivery vs Payment, listing of government securities, etc.) by the CSE and SEC affected you as an investor?

IB:

We were one of the first countries to be computerized in the region back then but now we are far behind due to not having implemented demutualization and other products to the market. More or less everything is finalized, the SEC act is in parliament ready to be approved and I read that the DVP is to be launched in May. I feel, that most of the things are in place and COVID has moved things forward such as implementing E-products. If demutualization takes place, the foreigner investors will find it positive. A foreign exchange will come in with collaboration with the CSE and also the other brokers will get certain stakes. I’m positive and I’m hoping without any further delay, these initiatives will take root soon.

IN:

Due to the digitalization taking place at the moment, what are your thoughts on the influx of new investors that have arrived into the market?

IB:

We need to give a training to the newcomers of the stock exchange as they start trading immediately without much input from the stock brokers. When the index starts falling slightly, these newcomers tend to panic and start selling immediately. There is a good side to digitalization as well as a bad side because newcomers who try to navigate the market on their own may tend to do damage to the market due to inexperience. When we ask the brokers why the market is coming down, they respond saying that it’s not them but must be their new online customers.

IN:

With the influx of inexperienced newcomers into the market especially from outside of Colombo, what steps do the CSE/SEC to control this situation?   

IB:

The CSE/SEC have begun going regional by conducting workshops and seminars in areas such as Kurunegala, Jaffna, Kandy, and Galle. They should also begin stock market education through TV channels. I read somewhere that stock market education will be conducted from grade six onwards in Sri Lankan schools. Stock brokers will also have to give clients a thorough training. Sometimes newcomers will make mistakes which are inevitable but as long as they learn from these mistakes and come back better, I see no harm.

IN:

For the betterment and improvement of the stock market, what kind of steps do you expect from the regulator as an investor?

IB:

People can be educated on the stock market such as valuations, etc. Regular people are more into savings in the form of Fixed Deposits. A few years back interest rates for 10-15% but now it’s at 4-5%. So, it’s high time that people are educated on the stock market and to have a passive income from the market. The cost of living will not come down and it is important that people understand the importance of having additional income by maybe investing in the stock markets, businesses, etc. People should know how important it is in a bad time (COVID) like today by investing in the stock market, you can get a good return. Therefore, it is high time that savings are focused on investing the stock market which is trading at 13-14 times of the PE. Also, look at regional markets such as India which is trading at 32 times, Malaysia 25 times and Singapore around 40 times. At the peak in 2011, our stock market was trading at 29 times our PE ratio. With the earnings season coming in, it’s going to be quite a good season with our PE ratio going up by 10-11 times. Since we are a frontier market, we should trade at 18-20 times. I see that we will have gains of 100%. Our price/book value ratio in 2011 was 3 times, currently we are trading at 1.2-1.3. Our market cap is about 3.2 – 3.3 trillion which if doubled, it should be 6-7 trillion of market cap with the existing companies. This is why I say people need to be educated on the valuations so that they would not sell shares at a bargain value.

IN:

On your public twitter account, you had predicted that the all-share index will rise to 11,000 or more by the end of 2021. Do you still stand by this statement? And what made you come up with this bold prediction?

IB:

End of October 2020, I predicted that the all-share index will rise to 11,000 by the end of 2021. But in January 2021, the index rose to 9000. Alas, due to the “famous letter”, the index has come down. I still feel by December 2021, we can reach that 10,000-11,000 mark again. My hope is that by May, we can reach 12,000-15,000 and within 2-3 years we reach 30,000. This is all based on valuations, currently our companies are doing well with many companies going regional. Incomes are increasing, interest rates are reducing, taxes have come down, and mergers & buy outs are taking place. Companies are making more business plans to reinvest their money. Another 500 companies are due to be listed in the stock market in next 4 years. All of this has taken place without foreign institutions coming in and when they do come in, it’s going to be a massive bonus. Also, what I noticed is that state funds have been away from the market since the bad period (2010-2011) and they have not come out from it. Even Mr. Cabraal says that our market should be 4 trillion and more. So I too request government entities to not be shy about investing in the market again despite the bad period in 2010-2011. If the government do their due diligence and invest in the good companies they too can make a profit for their EPF and bond investors. Back then, the government gave 10-12% in interest but now they can barely give 4-5% in the debt market and fixed deposits. Only way to receive higher returns is to invest in the market. And if the government does not do that now, they will have to answer many people in the future when the market is at 15,000. Taking all those bullish sentiments, I made my prediction and we were almost there but let’s see how it will be in time to come.

IN:

With the current situation do you still stand by the original prediction?

IB:

Nothing has changed from my original prediction. And as discussed the market came down due to this “letter” and not because companies were overvalued or decreased in profits. The valuations still stands and there is no reason for the market to stay at the current levels. It’s just that, we are facing the third wave of COVID which is the only bottleneck we are facing for now. We are expecting the vote on the port city bill in a few days which would result in more companies coming into the market.

IN:

What do you think about the advice coming in from a variety of social media accounts with regards to the stock market? Do we follow them or do we ignore them?

IB:

It’s good that a lot of people have learned about the market and are happy to disseminate the information and some have gone up to the levels of applying technical analysis. We should encourage them but we have to be vary of the source of information as some social media accounts may not have a credible presence behind it. So, I feel people by now have an understanding of identifying credible sources and at the same time, they do not have to believe or act on everything they hear through these social media channels.

IN:

Do you think that the new generation of technically savvy and social media connected investors, who depend on technical analysis and other practices as opposed to stock broker advice, are a welcoming or detrimental to the stock market? 

IB:

So, I see only few companies out of the 25 stock broking companies providing good research for their clients and if stock brokers can conduct proper research and provide a good analysis, investors will not have to rely on unsubstantiated social media channels. Therefore, stock broking companies will have to do more from their end to educate and enlighten their customers. And, we will have to live & work alongside social media advice in spite of their lack of accuracy by using our own brains.

IN:

What do you follow; Technical analysis, fundamental analysis, broker-house research reports or your own analysis?

IB:

I read everything. I’m not a technician who understands everything either. But I am slowly learning and I do my own research via the CSE website, newspapers, and other foreign markets. I learn from other foreign markets (valuations, etc.) and I apply those practices in our stock market. At any given time I only have about 10-15 shares that I am trading but these were bought 7-8 years back. I wait until my target prices are reached and then I only trade 10-15% maximum. Once I go into a certain company, I try to understand their business plan, management team, dividend payouts, and financials such as debts, etc and then once I am satisfied with a company and its management, I remain with them for a while and that has worked. As per my accounting principles, yearly I take mark to market so you do not have to realize your profits by 100% even. And you can see those realized & unrealized profits in my financials which I do not mind because if I feel I have to wait longer to convert those unrealized profits to realized profits then I will do so. My advice to other is to take a long term view and realize the maximum out of it as opposed to selling shares in a short time to receive a return of merely 10-20%.