By Shihar Aneez
COLOMBO, June 12 (Reuters) - Sri Lanka's share market has seen a net foreign outflow since the government declared victory in a nearly 26-year war on May 18, contrary to analysts' expectations of foreign interest.
Here are some questions and answers about why that has happened, and what clues that may hold for the bourse's future:
WHAT IS HAPPENING WITH FOREIGN BOURSE INVESTMENT NOW?
Immediately after the war ended, analysts predicted a boom in the undervalued bourse, which has an overall capitalisation of about $6 billion. Last year, the Colombo Stock Exchange had a record net foreign inflow of 13.9 billion Sri Lankan rupees ($121 million), despite the intensifying war at that time. But this year, with a government victory apparent, net foreign inflow was 1.4 billion rupees until the war ended, and since has turned to a net outflow of 258.6 million rupees as of June 11. Bourse data shows foreign sales were dominated by conglomerate John Keells Holdings and National Development Bank. WHY FOREIGN FUNDS ARE LEAVING?
Underscoring the outsized effect a single large investor can have in the small bourse, nine market players said the overall outflow is mainly because of one U.S.-based hedge fund run by a Sri Lankan. Analysts say the fund may be reallocating capital elsewhere or may be moving funds for personal reasons after the war.
ARE FOREIGN FUNDS SET TO ENTER POST-WAR SRI LANKA?
Yes. Analysts say they have seen a 20 percent increase in the number of foreign funds in the market, including some which left the Colombo Stock Exchange in 1992 due to the war. However, the amount of money they are investing is nominal despite the fact the market has risen around 48 percent so far for this year and is one of Asia's most promising bourses.
WHY AREN'T FOREIGN INVESTORS COMING AS FAST AS EXPECTED?
The main reason is exchange rate risk. Sri Lanka's request for a $1.9 billion IMF loan has not yet been approved, and investors are waiting to see what effect that will have on the rupee's exchange rate, which the central bank has actively managed. The bourse is also limited in terms of the number of companies and its market capitalisation. Besides, lowering interest rates have not yet sparked new corporate investment and so profits have not seen a rebound. Then there are people who are waiting for the post-war security environment to settle further. (Editing by Bryson Hull and Kazunori Takada)