Financial Times focuses on foreign exodus
Will Morgan Stanley trigger work for Colombo stock market?

The Colombo stock market is speculating on the possibility of Sri Lanka being re-included in the Morgan Stanley Capital International (MSCI) indices used by many international fund managers as a benchmark for the performance of their Asian portfolios triggering renewed foreign interest in the local market.

In a Hong Kong datelined report, the influential Financial Times last week attributed the sharp fall in Sri Lanka stock prices this year to foreign investors using the post-election rally as a chance to exit the market.

The report quoted the international sales manager of a major Colombo brokerage saying that foreign investors were selling out because Sri Lanka was dropped by the MSCI last June after total market capitalization here fell below USD 1 billion.

But now, with market capitalization at around USD 1.3 billion, despite the loss of some of the pre and post-election gains, there is speculation that Sri Lanka qualifies to be included in the MSCI once again.

"They don’t tell us about including or excluding us from their index," a Colombo Stock Exchange source said. "It’s all done on a basis of weightage. But if we are re-included, it will be a very positive sign."

He explained that certain foreign funds invested in the Colombo market exited with the exclusion. But inclusion would mean a return and if big funds would invest as little as 1 percent of their portfolio here, the gains in market terms would be immense.

A spokesman for a leading Colombo brokerage said that most investors were taking a shorter term view of the market presently. Their was no strong view on the peace process on which a lot of things hinged.

"There’s a positive view and a negative view and also an in-between view. That’s where the majority seems to be. But if the ceasefire holds for the next 8-12 months, there will be an impact on company performance as well as that of the economy," he said. "Obviously that will impinge on the market."

He was bullish about tourism bouncing back. That, he said, would reflect on the results of many companies. Admitting that he was looking at the scene from an optimistic perspective ("We have to be optimistic"), he was hopeful that things would look up for the market in the next 3 or 4 months.

Expectations that the UNP-led UNF would win the election and the realization of that expectation drove the CSE which was deep in the doldrums to rise a record 38% last year.

The Financial Times report noted that "the government has so far moved rapidly on the peace process, extending a ceasefire with the Tigers and inviting Norway in to mediate talks".

The international fund manager of the Colombo brokerage was quoted saying that the next catalyst for a market rally might be the opening of formal peace talks or more details of the budget expected in March.

"Investors are also hoping for privatizations this year," the report said, "particularly the listing of Sri Lanka Telecom which would provide a major boost to market liquidity".

It added: "Critical to the return of offshore fund managers would be the re-inclusion of the Colombo market into the MSCI. Since last year’s rally, it has returned to a market capitalization of about $ 1.3 billion., which might provide reason for a review of its status, the broker said."