Market capitalisation: Targets should be realistic

by Sanjeevi Jayasuriya

Sri Lanka has an ambitious plan to increase market capitalisation.

However, the target should be realistic and reachable within the time frame, a capital market expert and CFA Candor Group CEO and Director Ravi Abeysuriya said.

Sri Lanka’s market capitalisation is approximately US $ 22.7 billion at present. Despite drawbacks, the Colombo Stock Exchange has performed comparatively well in 2014 and according to Bloomberg was ranked the fifth best performing market in the region and the sixth best performing market in the world.

These are strengths that must be capitalised on to market Sri Lanka as a prime destination for investment, he said.

“We have one of the lowest participation rates for domestic investors in our capital market. Although we have around 765,000 CDS accounts (or around 583,000 if you exclude duplication due to joint accounts), a recent study has revealed that around 350,000 are plantation worker accounts and another 100,000 are student’s accounts which are dormant,” Abeysuriya said.

“Only about 25,000 CDS accounts are active. This is largely due to lack of investor confidence and trust in our capital market. To restore investor confidence and trust and attract more long-term savers to the capital market we need a paradigm shift in the way investment advisors treat clients. They need to act with integrity and competence and put clients’ interest above their own interest,” he said.

“We need more robust regulations and enforcement to take wrongdoers to task. Increasing the financial literacy of potential investors will be an important cog in attracting more local investors to the capital market,” Abeysuriya said.

“The improved liquidity in the market will also be an important factor to attract investors and to encourage incumbent investors to increase participation,” he said. It will be quite challenging for Sri Lanka to get to a market capitalisation of US $ 100 billion by 2020. At present, Sri Lanka’s total market capitalisation is approximately US $ 22.7 billion. Therefore, market capitalisation needs to grow by about 4.4 times by 2020, for Sri Lanka to achieve the US $ 100 billion target. Promoting the Colombo bourse alone is unlikely to get us there, he said. At present, the Market Cap to GDP ratio stands at nearly 30 percent. To achieve the targeted market cap of US $ 100 bn, the GDP has to reach US $ 200 bn by 2020 from its current US $ 76 bn. This needs an economic growth rate of nearly 22 percent annually which is unrealistic.