• Economic momentum signals a strong start to 2022, however, external liquidity position remains a concern
  • Equity to remain the preferred asset class amidst rising inflation
  • Leisure sector poised for faster recovery in the year ahead

While the direction of COVID-19 remains difficult to predict, the past year has shown that beating the fear of the known really is about how coming to grips with uncertainties and risks. Sri Lanka’s leading independent investment banking and wealth management firm, Asia Securities hosted the 5th Annual Sri Lanka Investment Conference - the first of a two-part event – on the 10th and 11th of January. This year's conference titled “Beat the Fear of the Known – Investing to Win in 2022” took an in-depth look into some of the key themes expected to influence investment portfolios in the year to come, as well as the asset allocation strategy for 2022. 

Kicking off day one of the conference with a 2022 global macro and market outlook, Jonathan Wilmot, Global Strategist, Aletheia Capital, Founder, WilmotML, and former Chief Global Strategist, Credit Suisse discussed his views about the impact of COVID-19 on the Wall Street, stating that, “Though it is evident now that the COVID-19 pandemic benefited corporate profits and equity markets in 2021 in comparison to the real economy, this is likely to change with the real economy starting to bounce back.” Commenting on global oil price expectations, Jonathan stated, “I think that oil prices, in particular, will range trade rather than trend higher in 2022. As of yet, we don’t have a structural shortage in oil supply, if we can get through winter without severe weather in Northern US, Europe and China. Beyond that, my call on energy is that oil prices will be something like USD 65 to 85 a barrel trading range, which is one of the things that’s going to help bring headline inflation right back down.”

Navigating the Rapids in 2022

Kanishka Perera, CEO, Asia Securities Wealth Management, put forward a framework for asset allocation heading into 2022 noting that, “The core theme in terms of our asset allocation strategy this year is navigating through substantial volatility. Three core pillars of our strategy are 1) negative real returns which are likely to remain during the short term, 2) asset return volatility which is at decade long highs in both the equity and bond markets, and 3) agility and liquidity in our investments.” A key factor highlighted by Mr. Perera was that it is important to move within different investment ideas at a rapid pace because of the heightened macroeconomic uncertainty this year. 

Day one of the conference brought together a panel of top investment experts across asset classes including equities, fixed income and real estate to understand where investors can optimize real returns. Nayana Mawilmada, President, Property Group, John Keells Holdings, Tharusha Ekanayake, COO, First Capital Holdings PLC and Kanishka Perera, Chief Executive Officer, Asia Securities Wealth Management touched on some of the key themes expected to influence investment decision in the year to come, as well as where can investors find the best returns. The panel was opened by Kanishka Perera, Asia Securities Wealth Management, who shared his outlook for equity markets, noting that “It is quite difficult to develop a view beyond a quarter. Overall, in 1Q we are somewhat positive in terms of equity market returns. There will be moments of market correction; we see those predominantly as opportunities to either increase our positions or average down to a certain degree.”

The most widely discussed economic trend of 2021—inflation—is likely to continue to drive conversations going into 2022. Commenting on the outlook for interest rates in the year ahead, Tharusha Ekanayake, Chief Operating Officer, First Capital Holdings PLC noted that, “The main factor I would look at is the first ISB payment that is due in January 2022 and the second ISB payment due in mid-2022. If we are not able to find adequate foreign inflows to manage our outflows, and a suitable IMF package, then we would be seeing more challenging consequences in the second half of the year.” 

Realty to Scale New Heights

Responding to a question on the demand for commercial office space assets, Nayana Mawilmada, President, Property Group, John Keells Holdings PLC stated that, “Office space has been a point of debate during COVID-19 with the view that that nobody is going to come to work anymore, but the way it has played out now is that it really didn’t happen. What did happen was a lot of employees became a lot more flexible, but the office as a place to come together, congregate and work as teams hasn’t really gone away. And we see that in the market. We actually see robust demand for office space, particularly grade A. Going forward, with lots of regional companies looking for location hedges and to diversify locations, you will probably see more Indian firms looking at Sri Lanka as a way to diversify their footprints.” 

Talking on the topic of real estate as a hedge against inflation, Mr. Mawilmada stated, “When you take real estate, you should not look at short term blips. You must look at the long-term horizon. Illiquidity is a handicap in this sector, but if you see how we have performed overall in the last ten years, inflation was in the range between 5.0% - 5.3% on average while the Greater Colombo Land Value Index, measured by the Central Bank, was about 10.4%. Even if you look at the Colombo Land Index, measured by the Lanka Property Web, it was ~13.4%. So, it is evident that real estate sector as a long-term asset class, can ride out inflation. Despite construction costs going up 11%-12% in the last three months, I believe we can re-capture that costs as part of the investment strategy.”

Day 2: Outlook 2022; In Search of a Corridor of Stability

Lakshini Fernando, Macroeconomist, Asia Securities Research, started off day two of the 5th Annual Asia Securities Sri Lanka Investment Conference with the 2022 macro-outlook. Speaking on the restructuring of Sri Lanka’s 2022 debt service payments, Ms. Fernando noted that, “Sri Lanka has two key options at this juncture; (i) maintain status quo if sufficient bilateral lending and swap agreements materialize early on, or (ii) reach out to the IMF for a long-term agreement. At this point, we see option one being viable only if non-debt inflows of at least USD 3.0bn come in through the sale of under-utilized asset sales in addition to government-to-government funding lines.” Following this, Asia Securities’ Co-head of Research, Naveed Majeed took the stage to present his outlook for equity markets for the year ahead. He stated, “We believe that liquidity in the equity market will remain strong given the high inflation environment. Investors may not have many other options to invest in. Therefore, we believe equities will still remain as the preferred asset class.”

The final panel for the conference was opened by Aruni Goonetilleke, Chairperson, Hatton National Bank PLC who discussed the impact to banks in the event of a sharp devaluation of the Sri Lankan Rupee. Ms. Goonetilleke noted that, “If banks that have retained profits which are dollars, then that’s going to be positive for banks. Because with a potential devaluation, the income plus the revaluation of dollar assets and dollar loans in the books is going to strengthen our balance sheet. On the negative side, if there are banks that have a net open position; that is if you have dollar obligations which are not covered with your dollar assets that can impact banks.”

Tempered Optimism Going Into 2022

Making the case for a strong recovery the tourism industry in 2022, Susith Jayawickrama, Joint Managing Director, Aitken Spence Hotels Managements (Pvt) Ltd stated, “We opened our borders for tourists just three months ago. In the prevailing environment, what tourists look for while travelling is the ease of travelling and entering a country, which the Maldives targeted and facilitated in the last year. Now we are seeing that Sri Lanka has adapted to this and is heading into the right direction. Visa issuance for double-vaccinated tourists has now become easier. I believe the results of this will be evident in the next few months. There might be bouts of slowdown because of COVID-19 variants. But factoring all this, arrivals look to rebound in 2022.” He also noted that there is a significant shift in tourist bookings. While European tourists would typically make bookings at least six months prior, in the post-COVID-19 environment bookings tend to come in just 30-45 days before arrival. Mr. Jayawickrama noted that hospitality players have adapted to this shift by offering more flexible options on bookings and cancellations and ramping up their online platforms.

Gihan Cooray, Deputy Chairman, John Keells Holdings PLC commented on the business environment for the company heading into 2022, stating that, “Overall inflation is good for a retailer in general. So naturally when food prices go up, you have that benefit of a higher price. But having said that, it’s then a question of the composition of the basket also changing. People will naturally buy essential items so how much is left for more discretionary items? In terms of our own strategy, we are trying to see what we can do to help our own customers to tide over and manage that situation.” He also noted that while there is a lot of uncertainty with the macro environment right now, the company is exploring several avenues to gear themselves for any potential shocks.

Commenting on the outlook for the agriculture sector following the transitional impact of the current policy uncertainty, Viraj Manatunga, Divisional Director - Pharmaceuticals & Sales at CIC Holdings PLC, stated that, “Demand and supply forces will determine the equilibrium in the market. It is up to organizations to come up with a hybrid model as to how to use organic and chemical fertilizer. Given the prices of fertilizer, farmers will decide on the crops they should prioritize and the extent of cultivation. It will be a more commercially driven sector in the future, as opposed to a sector driven by subsidies like in the past.” He noted that also that the current supply chain issues in terms of fertilizer will normalize soon, and the industry will recover in 1H 2022 because market players are allowed to operate freely without a subsidy scheme in place. 

Hosted by the Asia Securities’ award-winning Research team, the Annual Sri Lanka Investment Conference series is an integral part of Asia Securities’ calendar, that focuses on in-depth discussions with veterans in industry and policymaking and has garnered significant investor interest in the last few years. Asia Securities is a leading investment firm in Sri Lanka providing Investment Banking, Research, Equities, and Wealth Management services to local and international corporate, institutional, and individual clients.

Missed the conference? 

You can now access the full recordings from the two-day conference via the links below: