Post-War Sri Lanka: Poised For Growth?

Via Lanka Journal, an interesting look at the economic/investment prospects of a post-war Sri Lanka.  As the article notes:

“…IN SRI LANKA, THE INVESTMENT AXIOM that the best time to plunge into the market is when there is “blood on the streets” is tragically literal.

More than 80,000 citizens of the tiny Indian Ocean island were killed in a 25-year civil war between the government and separatist Tamil Tiger rebels. The hostilities ended in May after government forces killed off many of the rebels in a bloody last stand. It was brutal, it was ugly, but it united 21 million people, many of whom had never known a homeland that wasn’t at war.

Plagued by suicide bombings and Tiger air raids, Colombo’s war-torn stock market fell 40% in 2008. But on May 18, the day the triumphant Sri Lankan military paraded the bodies of the slain Tiger leaders on state television, the Sri Lankan All-Share index jumped 6%. It’s up 25% since May, and 60% this year. Asia enthusiast Jim Rogers, George Soros’ one-time partner at the Quantum Fund, recently wrote in his blog that “Sri Lankan stocks are the only equities I would consider buying at the moment.”


Dhammika Perera, a local banking mogul who’s also the head of the government’s foreign-investment board, says $4 billion to $5 billion will be spent rebuilding the shattered economy. The International Monetary Fund just approved a $2.6 billion loan to the island nation. The rest will have to come from private sources.

There’s a lot to rebuild. As Asian metropolises go, Colombo is more Kabul than Kuala Lumpur. War robbed Sri Lanka of the prosperity its Asian neighbors have enjoyed since the 1980s. Sri Lanka is one of the world’s poorest countries, burdened by an infrastructure that hasn’t much changed since the 1940s, when it British Ceylon.

Infrastructure aside, Sri Lanka bears some resemblance to Malaysia. There are some 27 million Malaysians, versus 21 million Sri Lankans. And they have a broadly equal cultural mix: Malaysia has a majority Malay Muslim community, and significant Chinese and Hindu Tamil minorities; Sri Lanka has a mainly Buddhist Sinhalese majority, and prominent Tamil and Muslim communities. But that’s about where the happy comparisons end, and where there seems so much upside for Sri Lanka.

Malaysia’s $230 billion economy is almost eight times larger than Sri Lanka’s. Whereas educated Malaysians export cutting-edge gadgets for the world’s tech titans, and need millions of migrant workers to help, Sri Lankans export tea and underwear — and its people, often to work in households and at building sites in the Middle East. Where Malaysians rush their goods around on a national network of modern freeways and ports, Sri Lanka has just eight miles of road one could charitably describe as a freeway. Strategically sited Sri Lanka — China is rebuilding its southern port for oil storage — has missed myriad opportunities to become the Singapore of the region.

SO, HOW DO YOU PLAY THIS CATCH-UP COUNTRY? For U.S. investors, the best route may be a mutual fund that invests in exotic markets, such as the Templeton Frontier Markets Fund. It can invest in Sri Lanka, according to its prospectus, but according to its annual report dated March 31 owned no stocks there.

Colombo brokers talk about a “peace portfolio” — and local-powerhouse conglomerate John Keells Holdings (ticker: JKH.Sri Lanka) is at its heart. The Colombo market is worth about $7 billion, and Keells is around 10% of it, a genuine proxy for the economy. From information technology to supermarkets, banks, tea and shipping, it’s difficult to spend money in Colombo and not bolster Keells’ profits.

Investors in Sri Lanka will want to see a genuine reconciliation between the Sinhalese and Tamils. As of July, some 200,000 Tamils were still held in refugee camps. Yet speculators expect a huge postwar surge of tourists to the island’s ravishing beaches. And Keells will benefit; it owns about half of Sri Lanka’s hotel rooms. Keells last year earned about $41 million on sales of $356 million. Its shares have roughly doubled since May. Local brokers such as NDB (part of National Development Bank) generally rate the stock a Strong Buy.

The island also is famous for its tea, and among the best-managed of the big plantation houses is Ceylon Tea Services (CTEA.Sri Lanka). CTS last year grew 31% to $37.86 million, while profits gained 8% to $9.8 million. Its shares have gained about 20% in the last year.

The war’s end has also prompted a flurry of new issues. One of the first to emerge is the $75 million fund of Singapore-based Calamander Capital. Chief Executive Officer Roman Scott says his is the first private-equity fund focused solely on Sri Lanka, and is taking stakes in tea, timber, rubber, property and banking. Scott confidently expects annual returns of 30% to 35%. “The difference now,” he says, is “the risk has finally been removed, and we are investing onto a blank canvas. There is only one way for us to go — and that’s up.”

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