Sri Lanka Performs better than BRIC Economies. Smart Money Highlights Investing in Smaller Emerging Markets

04th April 2011, www.island.lk

The BRIC economies have been trounced by Sri Lanka’s capital market surge and vibrant economic growth, being the gateway to India and Southeast Asia, said an international investment journal published by US based Dow Jones and Company Inc.

"It’s a stat that could lead many investors to do a double take: The stock market of Sri Lanka soared 91 percent last year. But it’s true. While all the attention, and most of the money, keeps going to the so-called BRIC countries (Brazil, Russia, India and China), they were trounced by a country many think of only when there’s a bad cyclone or a civil war.

And Sri Lanka, whose economy grew 8 percent last year, isn’t alone in offering another option to investors looking for emerging markets," Smart Money said in an article titled ‘Investing in Smaller Emerging Markets’.

It said as China looked to slow down parts of its economy, strategists were turning to other parts of the world for growth. "They don’t have to look very hard. Countries in both hemispheres have seen their economies surge along with their stock markets.

Part of this strong performance can be attributed to a surge in demand worldwide for the commodities found in some of these nations. And part of it is simply a result of the global economic recovery.

In some instances, such as with Pakistan, national economies and markets have rebounded from a disastrous two years. The best news for investors: While there might be corrections, even sharp ones, these nations have good prospects, according to some pros. "There’s a multitude of opportunities in these non-BRIC markets," says Nick Chamie, global head of emerging markets research at RBC Capital Markets, as quoted by Smart Money.

It says investing in these smaller nations brings a whole set of risks that even some of the BRIC countries usually don’t face. Inflation could have a greater impact on these nations than on bigger countries because energy and, especially, food prices have a huge impact on their citizens "Nevertheless, analysts are particularly high now on four emerging economies. Sri Lanka has seen a surge in trade-related traffic as a gateway to both India and the rest of Southeast Asia," Smart Money says.

"With new country-specific exchange-traded funds having started in the past couple of years and with more on the way—Global X Funds plans to launch one of the first Pakistan ETFs this year—it’s becoming easier for investors to get direct exposure to these smaller emerging markets.

Buying a basket of them would diversify risk across several nations, in case one of their economies goes south. Funds such as the Harding Loevner Frontier Emerging Markets have investments in Sri Lanka and other smaller markets. At the same time, emerging-market bond funds offer an easy way to add the smaller nations to an investor’s portfolio," Smart Money said.

Last September, it was reported that Sri Lanka’s sovereign bonds have out performed bonds from Brazil, Russia, India and China (BRIC) in international capital markets according to a survey carried out by JP Morgan Chase and Co. "Sri Lankan debt has returned 39 percent since May 18, 2009, when the government defeated Tamil Tiger rebels, according to JP Morgan Chase & Co.’s EMBI Global Index. That compares with 12 percent in China, 22 percent in Brazil and 26 percent in Russia. Company bonds of India, which doesn’t have a dollar-sovereign issue, delivered gains of 26 percent," it said in a Bloomberg newswire report.

"Demand for bonds from countries like Sri Lanka is still high," said Milan-based Francesca Di Cesare, who helps oversee $10 billion of assets including 2015 Sri Lankan debt at Aletti Gestielle SGR SpA, as quoted by Bloomberg newswire, "Investors struggle to find this paper."

The Colombo Stock Exchange has grown 11.7 percent from January 1 to April 1. Net foreign outflows amounted to a little more than Rs. 6.9 billion but Director General of Securities and Exchange Commission, Malik Cader, recently said foreign funds were not leaving the country, they were only exiting the stock exchange.

Inflation rose to 8.6 percent as food prices increased 7 percent.

The country’s bond market is relatively inactive for the moment with no buying interest with high inflation expectations.

Sri Lanka is confident its sovereign ratings would be upgraded this year and discussions with international sovereign ratings agencies Fitch, Moody’s and Standard and Poor’s, are expected to commence this month. Sri Lanka has strong macroeconomic fundamentals, and the International Monetary Fund (IMF) said it was happy with the progress made by Sri Lanka under a US$ 2.6 billion standby facility arrangement.

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