“A typical Emerging Market country would have 70 to 100 percent loans to GDP. Banks in Sri Lanka trade at cheap multiples, as shown earlier. Therefore in our opinion, banks are a cheap way to get exposure to Sri Lanka’s development,” Fraser said adding that he was very positive about the outlook of the Sri Lankan economy.
He noted that the best economic growth stories are very supply side-led and hence Sri Lanka can excel given that it is adding infrastructure such as port capacity to leverage its position on east-west shipment routes, developing itself into a transhipment hub, and working on more efficient and powerful power capacity
Meanwhile, highlighting some challenges in the economy, Fraser said there are some issues where Sri Lanka has some large twin deficits, and it must be careful to avoid the trap that many other emerging markets have fallen into by becoming dependent on foreign savings rather than domestic savings, to grow.
“The more pressing issue for us however is liquidity, and despite a plethora of theoretically interesting investments, the list of companies that offer sufficient ownership is fairly restrictive. Liquidity, however, will improve over time and anything that can be done in this regard will be very welcome,” he pointed out.
He added that if you just compare Sri Lanka with some of the other frontier markets, it is certainly less liquid, compared to Saudi Arabia, Nigeria, Pakistan and even Vietnam and it is also a little more expensive on earnings multiples, than some of these other markets.
“However, I believe that the long-term prospects are among the most attractive in the Frontier Universe. Therefore, we view Sri Lanka as a compelling place to invest on a relative basis but also on an absolute basis and consequently Sri Lanka is a large overweight on our funds,” Fraser concluded.
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