The well renowned Baron of the Rothschild dynasty once said “Buy to the sound of cannons, sell to the sound of trumpets" and who can argue with that? Well the tiny island and cricketing mad nation of Sri Lanka would. After funding a war for three decades, and juggling high inflation, even higher interest rates and a lack of foreign investment the trumpets have now sounded. And the Sri Lankan economy is primed for robust growth over the coming decade.
Well that is certainly our view here at Ataraxia Capital Partners. We see a number of key economic drivers in the Sri Lankan market that will hopefully fuel future growth and development in the island nation.
The low interest rate economic landscape that Sri Lanka currently enjoys has focused on the stimulus tap – effectively making money cheap and increasing the appeal and return from investments in a variety of asset classes. This has been confirmed by the robust growth in money supply (at over 18 per cent annualised).
In addition the rebuilding phase following nearly 30 years of lacklustre growth is driving foreign investment and economic growth looks set to be robust continuing to expand at an above-trend pace. In fact we at Ataraxia forecast an increase in growth to around 8.5-9 % year on year by the end of 2011. This figure represents a 2 % increase on the 6–6.5 % growth we have seen over the last decade.
More importantly industrial output has remained resilient at over 10 % in the March quarter, while strong tourist arrivals, continued expansion in exports should keep economic growth on a solid footing.
The strength in the Sri Lankan economy has certainly been reflected in equity markets and the trend looks likely to continue in coming months. In fact across 72 surveyed global share markets the strongest gains have occurred in Sri Lanka (up 59 %), followed by Argentina (up 42 %) and Russia (up 37 %). Interestingly the US Dow Jones is up 22 % from June 30 2010.
The key question we see at Ataraxia going forward is how long the sustained uptrend in equity markets will continue in Sri Lanka? Especially given that share markets are normally 6-9 months ahead of the economy. At some point markets need to take profit and a correction is likely to take place, which could result in institutional investors moving out of emerging markets into more sophisticated markets like the US and Australia as they continue to recover.
As an investor you may consider diversifying your portfolio into blue-chip shares as those with strong earnings forecasts will withstand any correction better than shares that are more speculative in nature. If your portfolio is not performing as well or if not better than the Sri Lankan All share price index which has risen 59 % since June 2010, you may look to consider a number of alternative investment strategies such as a core and satellite approach to investing, indexing or sector rotation.
(Wills is CEO of Ataraxia Capital Partners an international fund manager who trades in global equities and fixed income.Ataraxia Capital Partners are launching a series of products for the Sri Lankan market, the first of these is the A-Tracker fund. He can be reached at firstname.lastname@example.org).