Frontier markets: Sri Lanka rejects the old

By Peter Kohli

www.nasdaq.com: What was old isn’t necessarily new again. Good news out of Sri Lanka, where defeated President Mahinda Rajapaksa did not succeed in his attempt to return to power, this time as Prime Minister.

In fact, what his attempt managed to do was to strengthen the ruling party’s hand in the recent round of parliamentary elections in which they fell just short of an absolute majority, 45.7% to 42.4%. Current Prime Minister Ranil Wickremesinghe’s party managed to double the number of seats it won in an earlier election to 106, while the former President’s party lost heavily.

This is good news for investors because the former President’s party had forged bonds with China and was viewed as less market friendly. In fact, when current President Maithripala Sirisena won back in January, he put various projects the Chinese had been financing on hold, such as a reclamation project in the Port City of Colombo.

These projects were put on hold while the company behind them, China Communications Constructions, was investigated by the current Sri Lankan Government for corruption and fraud.

The new President is viewed as being pro-West, as is his party, recently hosting both Secretary of State John Kerry and Indian Prime Minister Narendra Modi. The results of the Parliamentary elections were immediately felt in the capital markets where local shares on the Colombo Stock Exchange were trading at seven month highs.

One in particular, Cargills PLC was up 6.67% as of the close of trade on 18 August. Unfortunately for US investors, the only way to gain exposure to the Sri Lankan economy, without setting up a brokerage account in Colombo, is the iShares MSCI Frontier 100 ETF (FM), in which Sri Lanka has a 2.67% slice.

Hopefully the new President and his party’s presence in the Parliament will bode well for the country and new investment opportunities will soon present themselves in the US.