Capital Alliance, Sri Lanka’s leading full service investment bank has received significant recognition as a leader in Sri Lanka’s finance and investment arena. Providing investors with an in-depth overview, Chief Strategy Officer Purasisi Jinadasa shares his insights on CAL’s outlook on local and global markets.
Key points for consideration: Highlighting the key areas to consider, Purasisi outlines the strengthening of the US economy, China’s search for long-term strategic economic markets and the potential for commodities. The implication for investors in Sri Lanka should be to shift to investing in short to medium-term debt/deposits and focus on fundamentally sound long-term consumption-linked stocks.
Consumption-linked stocks: In 4Q2014, CAL anticipated a Rs. 6-7k/month indirect rise in income due to energy tariff reductions. The additional subsidies and government sector wage hikes are likely to drive consumption growth over the next 9-12 months.
Therefore, we remain confident that the next five years will lead to strong disposable income growth (c.12% YoY) and GDP reaching c.USD 5000 by 2018E. However, its important investors understand that there will also be medium-term challenges as a direct result of Sri Lanka’s current expansionary fiscal policy. As the Central Bank cannot sustainably regulate both the exchange rate and the interest rate (while the Treasury absorbs money from the local economy), there are two possible scenarios in the medium-term which may limit the potential impact of consumption-led GDP growth for a couple of years: Firstly the LKR/USD could depreciate and secondly, interest rates may start increasing.
Commenting on CAL’s outlook further, Purasisi Jinadasa, Chief Strategy Officer, CAL stated, “We expect a combination of the above-mentioned factors to fall into play due to several competing priorities within current policy outlook. Nevertheless, the team at CAL is optimistic that Sri Lanka is resilient and likely to average 6-7% GDP growth over the next five years. Therefore, investors should diligently invest in a few selected consumer-driven stocks. CAL also recommends that investors place aside a monthly LKR value dedicated to building up an equity investment portfolio.
Keeping track of exchange rates and interest rates is also important and CAL’s global markets and research team can provide investors with all the insights they need to make sound investment decisions.”
An overview of CAL’s global market outlook: Purasisi advises that in order to understand the drivers of the global market, investors need to understand global politics as well as the health of major economies in order to gain an insight.
United States – The US has shown promising macro numbers reflected in its inflation and non-farm payroll. Job gains over the past three months have averaged c.190k/month, while wages have risen c.2% YoY (as of April 2015). The USD has also gained against major currencies over the past 12 months; 21% vs. EUR, 18% vs. Yen and 8% vs. INR. As US incomes strengthen (contributing to growth) and instability continues in most of the rest of the world, USD investment demand will rise and Americans will be likely to consume more. This is generally good news for countries exporting to the US, however bad news for countries seeking USD inflows for investment purposes.
China – Placing aside the macro numbers coming out of China, one point we can be sure of is China’s appetite for investments. China has a significant amount of money looking for places it can generate interest. This becomes very attractive for countries seeking FDI, as China’s investment policies are generally very long-term and countries may be able to negotiate favorable terms.
Europe – Is awaiting the inevitable. Greek demands are becoming an increasing burden on stronger European countries and a Greek fallout with the EU will have implications for all the ‘PIIGS’ nations.
The extremely worrying challenge is the deepening tangle fiscally prudent EU-members are falling into by extending the Greek debacle. The ongoing back-pedalling is detrimental to Europe’s future and is leading to an unstoppable collision, which will divide the EU along cultural lines. Germany’s per capita burden attributable to Greek debt stands at c.USD 800, while France’s stands at c.USD 725.
Commodities – Purasisi also advises that low commodity prices are expected through 2015. As the US economy strengthens, we expect gold prices to fall slightly as investors seek higher yields in the US. However, CAL expects Brent prices to remain between USD 65-70 as Saudi Arabia continues to supply the market at current levels to maintain its leadership. The delayed rise in inflation/interest rates in the US is mostly attributable to the breathing room provided by a fall in oil prices.
Prior to joining CAL in 2011, Purasisi spent two years as the global lead in the healthcare, biotechnology and medical devices sectors for Sustainalytics, a socially responsible investment research house with offices in Toronto and Amsterdam. He was also responsible for providing consulting services for companies interested in strategies to improve responsible business and investment practices. Purasisi earned an MBA in 2009 from York University (Schulich School of Business, Toronto).
While completing his MBA, Purasisi co-founded a custom menswear company, which has since grown to four stores in and around the GTA. From 2004-2006, Purasisi worked as an equities investment analyst at capital markets specialist outsourcer Amba Research in Colombo. He holds a BSc from Ithaca College, New York and is a Swiss citizen, with a wealth of international exposure. Purasisi has substantial experience in global equity markets and the portfolio construction for responsible and mainstream investors. As part of his role at CAL, he also heads the company’s independent research unit.