Legendary billionaire investor George Soros famously observed that “the most money is made when things go from terribly awful to just awful.” Coincidentally, this is also the time when hardly anyone wants to invest.
Few markets in the region probably embody that adage more than Sri Lanka. Currently classified as an Asian frontier market in the same company as Vietnam, Pakistan, Bangladesh and Kazakhstan among others, the country’s political instability grabbed the world’s attention on Easter Sunday when suicide bombers attacked three churches and three tourist hotels. While media focus was and still is pessimistic, Sri Lanka is recovering and rebuilding. A great deal of hope is riding on the December 2019 elections and this could indeed be a turning point for the nation. For investors, Sri Lanka offers a strong diversification benefit in the event that global market volatility increases. The correlation between U.S. equities and India indicate a strong positive correlation based on last five years of market data. Sri Lanka, on the other hand, has a negative correlation with both markets. The correlation between Sri Lanka stocks and India’s Nifty 50 and the S&P 500 in the U.S. is negative 0.442 and negative 0.556, respectively, according to Bloomberg data.
Mark Mobius, the veteran investor who earned the moniker as the “father of emerging markets,” believes the outlook for both Sri Lanka’s bonds and equities, which currently have valuations at 10-year lows, will rise as the political situation improves.
The CSE (Colombo Stock Exchange) is currently trading at 8.3 times earnings and the Sri Lanka Investable Universe of 305 stocks BF (blended forward) is 7.3 times earnings. By comparison, India’s stock market is at 27.9 times earnings. Source- Forbes
