Stock market, Mark Mobius and State entities

Colombo Stock Exchange

The expert of emerging capital markets, Mark Mobius was in Sri Lanka recently. A key recommendation he made for the development of the local capital market was to list certain State entities in the Colombo stock market. 

The local stock brokerages seem to have picked it up from him. It wouldn’t be surprising if the same was suggested when they met with the Prime Minister recently, to revive the stock market which has been dormant over the last five years.

What really drives the stock market?

It doesn’t make sense to pinpoint the absence of few State entities as the main reason for the poor performance of the stock market. The return of the State funds in to the stock market is also not a sustainable solution to the issue. The prime reason for the stock market to become attractive is the sustainable improvement in profitability of the companies that are listed. The recent tax cuts and the lower market interest rates are likely to improve corporate profitability which could attract investors in the months to come. 

However what matters most is the “sustainability”. The economic growth has to be maintained at high levels for the private sector to maintain a higher level of profitability. Therefore an overheating of the economy, a destabilising increase in inflation and interest rates should be avoided through Government policy. Whether that happens in the next year or two remains to be seen.   

Private sector not properly represented in stock market

Another key aspect for the attractiveness of the stock market is the availability of many diverse, lucrative companies. This could be the rationale behind the call to list State entities. However, leaving aside the State entities, what is clear is that some of the most attractive private sector entities are not listed in the stock market. 

The largest exporters of the country from apparel, tea, etc. segments are not listed. The Colombo Stock market doesn’t have a proper Technology sector. Sri Lanka has many IT, tech, software companies which are not listed in the Colombo Stock Market. Growth in global stock markets in recent times has been predominantly through Technology companies such as Amazon, Apple, Facebook, etc. 

The need to attract “stars” in private sector to stock market

The focus should be (and should have been over the last so many years) for the Colombo Stock Exchange to engage with the attractive private sector entities to encourage them to list in the stock exchange. There is no doubt that some of these entities would not be interested to be listed as there may not be a need. 

That’s why the Colombo Stock Exchange should have initiated a dialogue with respective Governments and the Treasury to come up with incentives to attract these entities to the stock market. That does not seem to have happened effectively.

Listing State entities is premature and unnecessary

Coming back to the point on State entities, only a handful are making substantial profits to justify listing in the stock market. The two or three State Banks are in the forefront in that aspect. In the stock market, it’s the banking and finance sector which is most established as the largest private sector banks which are listed are financially quite sound. Therefore the inclusion of two or three more banks would not diversify the investment options in the stock market for an investor.

In short, taking up the contentious topic of listing State entities with the natural resistance of trade unions could be both unnecessary and premature. This is even more pronounced when one thinks that there are other urgent measures that should be taken as highlighted above.

Forcing State funds is also not the solution

On the other hand, the share prices should not be pushed up by pumping State funds. If the share prices are appropriate and business prospects attractive, investors would flow in (including the State funds). Hence the solution is not to compel the State funds to invest, but rather to have skilful and experienced professionals to manage the State funds and to give them the autonomy to make investment decisions. 

Such a set up should obviously include appropriate risk mitigation mechanisms. However at the same time it should be understood that investments involve calculated risks, and the officials should not be found fault later as long as they have adopted a rational investment process.

Stakeholders need to come up with better strategies

There is no doubt that Mark Mobius is a legendary emerging market investor. However he has hardly invested in the Sri Lankan stock market and I doubt he has even analysed the Sri Lankan stock market. His advice on listing State entities, therefore is best considered as a passing remark rather than a well thought out, serious advice. 

The local stock broking community would do well to do their own analysis on the matter rather than clinging on to this kind of opinions. Maybe it’s the dearth of talent in the industry that has resulted in the absence of a concrete viewpoint for the development of the industry. 

(The writer could be contacted on [email protected].)