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Thursday June 20th, 2024

CAL’s Compelling Case for Investors

Kanishke Mannakkara Chairman of Capital Alliance Investments Limited (CAL)

The economic revival is unlocking unprecedented investment opportunities.

Kanishke Mannakkara, Chairman of Capital Alliance Investments Limited (CAL), shares insights into the evolving economic recovery and emerging investment opportunities unprecedented in scale.

“We believe that the recent crisis has resulted in significant turbulence,” Mannakkara says in this interview. However, he adds, “We believe challenging times can lead to sound policies, and this unprecedented crisis presents an opportunity for Sri Lanka to change course. We have already seen some positive developments in this regard”.

Mannakkara begins by explaining the critical assumptions about the economic outlook and CAL’s strategy for the immediate future:

Over the past two years, we have witnessed how a shift towards more orthodox economic policies can bring about a sea change in the local macroeconomic environment. Building on this, we anticipate a period of moderate to high growth in the coming quarters. Our forecasts are more optimistic than those of the IMF or World Bank. We expect the economy to grow this year starting from the second quarter. Assuming the government continues the ongoing reforms, we believe Sri Lanka can sustain 3-5% economic growth over the next four to six years.

We anticipate that inflation will moderate quickly, possibly over the next three months, due to base effects and a slowdown in price rises. We also foresee a sharp decrease in interest rates, they have already dropped by 600 to 700 basis points since the start of the year, and we expect this trend to continue. In addition, there have been interesting structural changes in the balance of payments. We observe a recurring balance of payments surplus of $200 to $300 million per month, which is significant for the domestic economy. This surplus arises from reduced demand for imports and the resumption of tourism. While there has been a brain drain with negative implications, remittances from overseas Sri Lankans will likely increase, further contributing to the surplus. This could lead to stable exchange rates and give the government the cushion it needs to implement other, sometimes unpopular, reforms. Considering the opportunities that may arise from this situation, the IMF and other institutions have highlighted the importance of freer markets and state deregulation as crucial reforms. We support these measures and believe they will create numerous opportunities for businesses and investors, including our clients. As these reforms unfold, we anticipate that CAL, as an investment bank, will also benefit indirectly across multiple verticals.

Based on that outlook, what are the investment opportunities?

Let’s begin with Sri Lanka. The first opportunity is with interest rates. The current rate of 25% is not sustainable for the long term, especially considering the low month-on-month inflation rate, which translates to a real inflation rate of approx. 20%. Such high real interest rates are not viable in the long run. The decline in interest rates presents a fixed-income opportunity unprecedented in my 20-year career in the capital markets.

The second opportunity lies in asset prices. As interest rates decline, we can expect asset prices to increase. This typically starts with more liquid assets like equities, before spreading to less liquid assets like real estate. Asset prices in rupee terms have fallen slightly over the past two years, which means that in real terms, they have declined by 50-60%. This presents a significant opportunity for investment. When an asset falls by 50%, buying at the bottom can result in a 100% return when it rebounds to normal levels, presenting a compelling opportunity in various asset classes.

CAL is no longer limited to Sri Lanka. Our focus is frontier economies as a whole. There seems to be a global shift in assets, with increasing chatter about U.S. assets, particularly U.S. equities, becoming overvalued and creating expectations for global asset allocations to transition back into emerging and frontier markets. This shift in asset allocation could present exciting opportunities, especially in equities, across Asia and Africa.

How are you positioning yourself to unlock growth opportunities for CAL and its clients?

We’re positioning ourselves for growth in three areas. First, the internationalization of our business. The recent crisis has taught us the importance of not solely relying on the local economy. It has pushed us out of our comfort zone and made us realize the opportunities that lie in the regional space. Our objective is to establish a presence in five to six frontier economies with a combined GDP of over a trillion dollars, and we are making progress towards this goal.

The second focus area is technology. There is a lot of buzz around artificial intelligence (AI) and other emerging technologies, and we see multiple layers in which these technologies can benefit our industry. We are rolling out a retail offering where the client management is predominantly tech-based, without adding headcount at CAL. We are also exploring how to integrate AI into our investment decision-making processes.

The third focus area is innovation and product creation. Although financial services are not typically associated with manufacturing, we see ourselves as product manufacturers. As economies liberalize and markets become freer, there are many opportunities to create new and compelling investment products. CAL’s purpose is to enable the growth of capital markets in frontier economies, as we believe sustainable growth in these economies can only come from the development of robust capital markets. The crises we’ve lived through may represent an inflexion point for domestic policy in Sri Lanka and other frontier markets. There is significant potential to develop innovative new products in this environment.

When you contemplate the future, what do you envision for CAL?

CAL conducts transactions worth over $1 billion annually, with a team of 150 employees in Sri Lanka and about 30 people in Bangladesh. Our focus is on expanding our global footprint in frontier markets, rather than emerging economies like India or Malaysia, to create a combined GDP footprint of over a trillion dollars. At that scale, we believe we can become a conduit for globally significant fund flows, revolutionizing the landscape in the countries we operate in. To achieve this, we emphasize leveraging technology and optimizing employee productivity to maximize value-add per employee. We have invested in cutting-edge technology to establish an advanced tech platform for investment banking services, and have proprietary intellectual property (IP) around our technology. One of our core values is that we are always only ‘two years away from irrelevance’, driving our pursuit of innovation and new product creation to reflect our relentless commitment to evolution and growth.