People in Sri Lanka are missing out on the Power of Investing

People in Sri Lanka are missing out on the Power of Investing
Ravi Abeysuriya, CFA, Group Director / CEO of Candor said at the seminar on "Stock Market: Regulatory Framework
and Investment Challenges" organized by The Ceylon Chamber of Commerce that “the Capital Market in Sri Lanka is
under-owned versus its frontier market peers and as a result people miss out on a valuable opportunity to build long
term savings for retirement”.
He said “we have one of the lowest participation rates of
domestic investors in our capital market. Although we
have today around 765,000 CDS accounts (or around
583,000 when duplication due to joint accounts are
excluded) a recent study has revealed that, around
350,000 are plantation worker accounts and another
100,000 are student’s accounts that are dormant. So in
actual fact actively trading happens in only about 25,000
CDS accounts”.
Figure 1: Domestic Investor Participation Rate in the Stock Market
It was pointed out that this was largely due to lack of investor confidence and trust in our Capital Market. To restore
investor confidence and attract more long term savers to the capital market he said “we need a paradigm shift in the
way our investment advisors treat their clients”. He showed that whilst better regulation and enforcement of
regulation is required there is empirical evidence that robust governance require a focus on ethical culture within
the financial firms such as the stock brokers and asset managers. To restore trust, we need a shift towards greater
integrity and accountability. We need a stronger and systematic ethical dimension. Getting back on the right path
requires education and leadership that is sustained over many years. “Most importantly, it requires investors and
financial leaders taking values as seriously as valuation and culture as seriously as capital”. Even Pope Francis has
recently said “it is important that ethics once again play its due part in the world of finance” and that markets “serve
the interests of people and the common good of humanity.”
When investors do not trust the capital market, they are unlikely to save and invest for their future and achieve their
long term financial goals. Sri Lanka being one of the fastest aging countries in the world, Mr. Abeysuriya stated that
“there will be a massive social impact to Sri Lanka in the not too distant future unless they start investing. People will
have lower quality of life and may have to work longer and will have intergenerational stress”.
He said that The CFA Institute with its Future of Finance campaign is getting the message out to unite investment
professionals in a commitment to place investor interests above all others. This initiative aims to create awareness
about the CFA Institute “Code of Ethics & Standards of Professional Conduct”, “Asset Manager Code”, Integrity List"50 Ways to Restore Trust in the Investment Industry" and encourage the global investment community to endorse
and share the Statement of Investor Rights. Which is a list of 10 rights that any investor anywhere in the world
should expect from financial services providers. Mr. Abeysuriya said his favorite seven from the 50 ways to restore
trust are: 1. Name and shame unethical behavior. 2. Advocate for stronger regulations that protect investors. 3.
Never overlook unethical behavior because you’re better served by ignorance. 4. Bring to justice to those who take
part in irresponsible and illegal activities. 5. Help clients focus on risk as much as they do on performance. 6. Strive
for a conflict-free business model and 7. Act with integrity 24/7 – not just at the office!
For Sri Lanka to transform our capital market to a wealth-creating opportunity we need to get some vital
components right. If the investment advice is accurate & reliable, transparent and is received by everyone at the
same time, the less likely it is that decisions will be made on emotion and herd instinct. All stake holders need to
instill public trust in the market, market intermediaries that serve the best interest of clients, and robust regulatory
standards that protect investors and advocate fair play. Similarly market liquidity has a very strong relationship with
stock market growth. The price discovery mechanism will work more efficiently and market manipulations can be
prevented if the liquidity of the shares traded is increased. Investors too need to be financially literate and more
prudent. “When we have a blood clot in our brain we inquire about who the best, most qualified and respected
Neurosurgeon is, not go to a smooth talking nearby Barber, but when investing their hard earned money most
people fail to do so in Sri Lanka”.
Mr. Abeysuriya, went on to say that a Government policy change is required with regard to building the capital
market. We have to get Sri Lanka into the MSCI Emerging Market Index, which could be a major catalyst to attract
foreign investors to our capital market. This can be achieved by listing two large profitable state institutions and
establishing a public float of over 20%. USD 9.5 trillion in assets is estimated be benchmarked to MSCI indexes. When
Sri Lanka is in the index, MSCI Emerging Market Index tracker funds will be required invest in Sri Lanka as they need
to replicate the index.
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The presentation concluded by
showing what people in Sri
42,679
Lanka miss out by
45,000
Real Stock Mkt. Return
demonstrating the “The Power
36,614
40,000
Real Savings A/c Return
35,421
34,049
of investing” He said Rs.10,000
35,000
30,985
29,730
invested by a risk averse
30,000
investor in the NSB savings
22,023
25,000
account in 1985 will be worth
18,569
20,000
15,445
only Rs.2,379 in 2015 even after
10,625
15,000 10,000
compound interest due to loss
8,119
of purchasing power from
10,000
2,379
inflation. Whereas, the same
5,000
Rs.10,000 invested in the ASPI
by a risk taker would have given
him or her the ability to by
Rs.35,421 worth of goods or
Figure 2: Real Stock Market Returns vs. Real Savings Account Return (Net of Inflation)
services in 2015 after inflation,
that is 3.5 times more. However,
he cautioned the risk of investing without a long term perspective as stock markets go up as well as down and
therefore require the staying power to wait until the markets recover over time. He also said the potential for a
prudent investor that invests in a portfolio of fundamentally sound stocks taking advice from a professional
investment advisor who has the client’s interest at heart will have returns which will be several times more.
Mr. Abeysuriya encouraged everyone to become financially literate, make use of the Power of investing to transform
their lives and for their dreams to come true. For most people the capital market is the means to participate as an
owner in the growth of the companies that make up the Sri Lanka economy. What makes it powerful is that
companies are motivated to grow their businesses over time. Stock ownership is the way for individuals to
participate in that growth. Of course investing takes optimism about the future opportunities. It requires investing
wisely, taking a reasonable amount of risk and a long term view and most importantly getting professional help.