Emerging Markets: Sri Lanka, Land of the Moonstone


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It all started with cinnamon. Cinnamon is the reason why the Portuguese initially colonized Ceylon. The Portuguese were ousted when the King of Ceylon turned to the Dutch to rid his country of the invaders. Then the British defeated the Dutch and made Ceylon part of its empire. In the early part of the 19th century, the Brits created large coffee plantations, because coffee had become very popular in Britain. In the latter part of the same century, tea plants were introduced into the country from China, which led to Ceylonese tea becoming the prized beverage throughout the British Empire.

Ceylon became independent in 1948, and eventually changed its name to Sri Lanka in 1972. The 1980s saw the outbreak of civil war, which lasted on and off for more than 20 years, and rent the country across ethnic lines. Finally, in 2009, the Tamil Tigers were defeated by the Sri Lankan Army and peace—albeit with remaining deep-seated resentments—has reigned ever since.

Still, during all this upheaval and time, Sri Lanka has managed to move its economy forward. In 1977, the government adopted a free market economy that has transformed Sri Lanka into one of the leading economies of the developing world, and lifted the standard of living and well-being of its entire population. One example of this is that the life expectancy for Sri Lankans rose to age 74 in 2012, from age 50 in 1948.

Today, Sri Lanka’s economy is expanding at a rapid rate, even though its GDP is still predominantly driven by tea, rubber and coconuts. The textile industry is booming as a result of relatively cheap labour and an abundance of raw materials. Tourism, as a contributor to Sri Lanka’s GDP, is growing in significance. Sri Lanka’s gross national income (GNI) outpaced that of all other South Asian developing countries at $3,170 in 2013; the average for other developing South Asian countries in 2013 was $1,473. As a result, poverty rates dropped to 6.7% in 2013, from 28.8% in 1996. Annual GDP growth was 7.3% in 2013 and is forecast to remain the same in 2014—that’s nearly 3% ahead of the rest of developing South Asia, which has an average GDP growth rate of 4.8%.

So what accounts for the rapid development of this tiny nation located off the southern tip of India? And why should foreign investors care?

The Sri Lankan government has declared two priorities that are influencing the country’s growth: 1) attracting foreign direct investment (FDI) and 2) expanding the economy into the manufacturing, data and financial industries.

Sri Lanka was the first country in the region to liberalise its economy and open it to foreign investment. It was able to do this by first and foremost tackling the ogre of an over-indulging bureaucracy left by the British civil service. This resulted in, among other things, a limit on the number of days in which to open a business to eight in 2014, from 58 in 2004. Additionally, foreign investors can now move their profits out of the country without any onerous controls or procedures. These actions resulted in the country attracting $1.3 billion in FDI in 2013; Global Finance forecasts Sri Lanka will nearly double that amount to $2.4 billion in 2014.

Currently, there no Sri Lankan stocks with ADRs trading in the U.S., nor are there any Sri Lankan mutual funds or ETFs. The Blackrock iShares MSCI Frontier 100 ETF (FM) provides exposure to the Sri Lankan markets to the tune of just 1.93%.

A better way for investors to gain more meaningful exposure to the Sri Lankan economy is by investing directly. The All Share Price Index (ASPI), one of two benchmark indexes of the Colombo Stock Exchange (CSE), is up 21.50% YTD and 23.96% for one year. In July 2014, Ceylon Asset Management launched a dollar-denominated mutual fund that will invest in sovereign debt and securities issued by rated banks and firms in Sri Lanka.

Another popular method for investing in listed Sri Lankan stocks, for both domestic and foreign investors, is via unit investment trusts (UITs), of which there are a few to choose from. In order for foreign investors to take advantage of UITs, they have to first open a securities investment account (SIA) with a bank in Sri Lanka. This type of account allows investment dollars to flow freely in and out of Sri Lanka.

To enable investment in an SIA, investors must maintain a minimum of 5000 Sri Lankan Rupees (LKRs), which is roughly $38 currently. The funds may then be transferred from the SIA into the UIT. Investors should only invest in UITs that are members of the Unit Trust Association of Sri Lanka. Interested investors need only open this link to learn how to open an account and obtain all the necessary information required for an informed investment decision.

In closing, I believe Sri Lanka has put in place the necessary reforms and is on the road to continued rapid economic expansion—and not just in its indigenous industries. It’s worth noting that numerous multinational companies, including Cargill, Chevron (CVX) and Singer, have opened manufacturing plants and offices in Sri Lanka. Just like the Meetiyagoda moonstone whose white iridescent sheen is admired worldwide, Sri Lanka will surely soon be making a star appearance in foreign investors’ portfolios.

Peter Kohli
pkohli@dmsfunds.com | 484.671.3011

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas
Referenced Stocks: FM , CVX

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