Sri Lanka crisis negative for economy, polls seen positive for stocks
ECONOMYNEXT – Sri Lanka’s political crisis is not good for economic growth but investors see early elections could be positive for the stock market, according to Tundra Fund, a Swedish based fund focussing on less well-known frontier markets.
“Many were surprised that Sri Lanka, in the midst of what constitutes a constitutional crisis, was one of the winners during the month and rose almost three percent,” the fund said in its latest monthly commentary.
The crisis was triggered when President Maithripala Sirisena sacked Prime Minister Wickremesinghe in late October and appointed former President Mahinda Rajapaksa as the new prime minister.
Courts have stayed Rajapaksa’s appointment and are hearing several challenges to Sirisena’s actions, including a sudden dissolution of parliament.
Tundra Fund said in an assessment of the market’s reaction to the crisis that it concludes that local investors have been aggressive buyers since the crisis began in late October.
“From a purely cynical market perspective, investors find that Rajapaksa, despite all allegations of corruption and human rights violations during the Civil War, is better suited to leading the country,” it said.
“The current political crisis is, of course, negative for the country’s economy in the short term,” the fund said, adding that:
“Despite the risk of continuing turbulence in the short term, we conclude that much of it has been discounted by the market. An early election would be clearly positive for the stock market.”
The Tundra Sustainable Frontier Fund focuses on the next generation of emerging markets such as Vietnam, Bangladesh, Sri Lanka, Pakistan, Egypt and Nigeria, most with strong population growth, rapid urbanisation, investments in infrastructure, and growing middle classes.
It has 12 percent of its funds allocated to Sri Lanka with the largest holding in John Keells Holdings, with three percent of the portfolio.
(COLOMBO, December 10, 2018)