The Sri Lanka Capital Market: Good Governance for New Opportunities Ravi Abeysuriya, CFA
Group Director / CEO Candor Group CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of Candor is strictly prohibited
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Domestic Investor Participation Rate in the Sri Lankan Stock Market is One of the Lowest
Source: Investor Protection, Equity Returns, and Financial Globalization, JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS Page 2
The Industry has lost Investor Trust
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We Must Restore “Trust” in our Capital Market
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Asset Management is Least Trusted
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Factors Contributing to Lack of Trust
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Ethical Issues Facing Global Markets
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The Cost of Failure of Trust - Miss out on the “The Power of investing”
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Firm level Actions Most Needed to Improve Investor Trust
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Trust Attributes
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CFA Institute Code of Ethics & Standards of Professional Conduct
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CFA Institute Asset Manager Code
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CFA Institute Integrity List
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CFA Institute Statement of Investor Rights
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Key drivers required to foster growth of the stock market Companies/Issuers Willing to disclose & avert insider trading Corporate governance Financial transparency & avoid accounting manipulation
Intermediaries Adopt a Code of Ethics Serve the best interest of their clients “High quality” – value reputation, ethics & professionalism
Investors Have trust & confidence in the market Are financially literate Have a long term investing perspective Have strong & professional institutional investor base
Integrity of the market & its participants and market liquidity Quality of governance, Pro Growth Policy Reform Greater choice of instruments to manage risks Expansion of institutional investor base Encouragement for large companies and state institutions to list Laws that safeguard property rights Page 15
Robust Regulation Market needs to be fair & orderly Enforcement and sanctions that instill confidence in the market Benchmarked against global standards
Reform Equals Opportunity for the Sri Lanka Capital Market • Capital Market is under-owned by domestic investors versus its emerging market peers • Industry players willingness to act in a professional & ethical manner for the long term future of the industry • Governance reforms & improvement in capital market regulation, demutualization of CSE, DVP & CCP, National Payment Gateway, e-KYC • Pension reform will increase long term saving and “institution capital” • Sri Lanka is the gateway to India – India will become world’s largest economy and will have the largest population, Foreign investors will continue to surge to India as reforms by Prime Minister Narendra Modi take hold and investors search for growth (India stock up more than 20% last year) • The magnitude of the impact depends on the commitment to reform by all stake holders
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Opportunity to establish a facility to check out the integrity of RIAs & Market Intermediaries
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Opportunity to increase the domestic stock market participation rate • Growing Body of empirical evidence showing that weak investor protection is negatively related to stock returns • Equity returns are lower in weak investor protection countries as stock prices do not reflect the demand from foreign & local portfolio investors • Wealthy investors have an incentive to become controlling shareholders as firms cash flows accrue largely to controlling shareholders • Price of weak corporate governance stocks is not low enough due to high demand from controlling shareholders • Foreign & local portfolio investors avoid investing in countries where the domestic stock markets display weak governance
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Opportunity for inclusion in MSCI Emerging Market Index • Being included in the MSCI EM Index has much larger implications for Sri Lanka • Convincing evidence of positive price impact upon inclusion • “Radar Screen Effect” – attract more distant investors and hence require lower expected returns • Stocks included in the MSCI EM get increasingly integrated with the world markets which means there is increased risk sharing between local and foreign investors • Listing two large and profitable state institutions and establishing a public float of over 20% could be a major catalyst to attract foreign investors to our capital market • USD 9.5 trillion of assets are benchmarked to MSCI indexes - When Sri Lanka is in the index, MSCI Emerging Market Index tracker funds will be required to invest in Sri Lanka as they need to replicate the index. MSCI EM Index captures large and mid cap representation across 23 EM countries with 836 constituents, Index covers approximately 85% of the free float adjusted market capitalization in each country Countries include: Brazil, Chile, China, Columbia, Czech Republic, Egypt, Greece, Hungry, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Russia, Qatar, South Africa, Taiwan, Thailand, Turkey, UAE Page 19
More opportunity for long-term saving and investment propositions • Sri Lanka has one of the fasted aging populations • Asia is replacing Europe as home to the highest population of middleclass people • Global investable assets for the asset management industry are expected to increase to US $100 trillion by 2020 with an estimated compound growth rate of over 6% per annum higher than global GDP growth • The need of the hour is fostering a robust asset management and pension fund industry
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CSE Returns & Volatility INDEX
1 YR RETURN (%)
3 YR RETURN (%)
5 YR RETURN (%)
Period
Annualized
SD*
Period
Annualized
SD
Period
Annualized
SD
ASPI
14.6
16.0
3.5
48.6
14.5
15.4
69.4
11.3
14.8
S&P 20
17.3
19.0
3.8
44.2
13.3
13.5
67.8
11.1
17.6
MSCI Emerging
1.9
2.1
4.0
15.6
5.1
18.8
13.1
2.5
18.1
Hang Seng
21.8
24.1
5.0
51.0
15.2
20.1
42.3
7.4
20.2
S&P BSE 500 Index
16.2
17.8
5.2
70.3
20.1
26.2
57.7
9.7
32.4
FTSE Malaysia
-2.4
-2.4
3.0
15.0
4.9
19.9
41.5
7.3
17.8
Jakarta Composite
3.9
4.2
3.2
32.7
10.2
23.0
81.9
12.9
25.1
13.1
220.5
1.7
Candor Recommendations*
*Candor’s recommended stocks are included for a holding period of 2 to 3 months & annualized return is an average value of all the annualized returns of respective recommendations * SD – Monthly range for 1 YR volatility & Yearly range for 3YR & 5YR Volatility Source: Bloomberg, Candor Page 21
ASPI vs. Other Regional Markets – 5 yr Return & Volatility 35
% 30
25
20
15
10
5
0
ASPI
MSCI Emerging
Hang Seng
S&P BSE 500 Index
5YR Annualized Return
FTSE Malaysia Standard Deviation
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Jakarta Composite
Source: Bloomberg
How Investors miss out on the Power of Investing Real Stock Market Returns vs. Real Savings Account Return 45,000
42,679
Real Stock Mkt. Return Real Savings A/c Return
40,000
36,614
34,049
35,000
35,421
30,985
29,730 30,000
22,023
25,000
18,569
20,000
15,445 15,000
10,625
10,000 8,119
10,000
5,000
2,379
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2015
2014
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2012
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2010
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2003
2002
2001
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2000
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1996
1995
1995
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1991
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1986
1985
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Conclusion Good Governance and Ethics is critical to market development and can provide grater opportunities for investors and the society at large Bad Governance
Good Governance
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Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15
CSEALL vs. Global indices: June 2009 - March 2015
400%
350%
300%
250% CSEALL DJI
200% FTSE 100
Straits Times
MSCI Emerging
150% S&P 500 Hang Seng
MSCI World
100%
50%
0%
Page 25 Source: Bloomberg
New rules would make advisers put investors first
http://www.usatoday.com/story/money/2015/02/23/new-rules-financial-advisers/23878905/ Page 26