Saturday, January 2, 2010


The Sensex is a big brand, which celebrates is 25th birthday today. It is an index, calculated as an average of 30 prices of stocks listed on the Bombay Stock Exchange. These are 30 largest companies, and the average price is taken by adjusting for their respective weights.
The 30 companies used in the Sensex today is different from the 30 companies few years ago, because the league of the top 30 keeps changing. Indeed, only 11 of the original 30 from 1986 remain in the Sensex today.

For Indian investors, Sri Lanka may well live up to its name of being the emerald isle, with its all-share index rising by 125 per cent in 2009             
You can choose to invest in any of those individual companies (the so-called ‘large cap stocks’) or you can invest in the Sensex directly. If you had invested Rs 100 in Sensex one year ago, it would have become Rs 180 today. If instead, you had invested in gold, then your investment would have risen only by 25 per cent. The Sensex has soared by 80 percent, it's highest single year rise since 1991, and among the biggest gainer in stock markets all over the world. India beat China in this race during 2009.

However, the stock market, which beat everybody, was from neighbouring Sri Lanka, whose all-share index (not just 30 stocks) rose by 125 per cent. Colombo’s performance was the world’s best, thanks to foreign inflows, declining inflation, lower interest rates and outlook for stability. Sri Lanka is expected to reap a peace dividend after the defeat of LTTE, and the end of a virtual civil war for the past 25 years.

The country will elect a new President on January 26, and then vote for a new Parliament in April. The Sri Lankan system of government is a mixture of presidential (American) and parliamentary system (Indian), with the president being answerable to an elected Parliament. However, the former can dissolve the latter! There are 22 candidates in the fray, with two leading contenders being incumbent President Mahinda Rajapaksa and former Army chief General Sarath Fonseca, who was instrumental in the victory over LTTE. Former world

cup winning captain Arjuna Ranatunga is supporting Fonseca, though the promise of peace dividend might favour the incumbent President. If the incumbent government led by Rajapaksa comes back to power, it will be a repeat of the UPA victory in India’s parliamentary elections in May 2009.

Sri Lanka’s elections are as colourful as India’s, so expect much cacophony and noisy campaigning. Whatever the outcome, the outlook for the economy is bright. The north-eastern Tamil-dominated area will need massive reconstruction and investments. Unfortunately, wars lead to destruction, and then to economic revival. Elsewhere too in the economy, tourism, fisheries, agriculture and services are expected to grow twice as fast this year. The Lankan currency is also strengthening, and remittances are growing too. If you invested in Lankan government bonds last year, you would have made a safe return of at least 20 percent. Of course, the risky Colombo stock market would have given you 125 percent.

Lanka has very high literacy and relatively better health care. Its population is only two per cent of India, while the economy is four per cent. Were it not for the terrible two-decade long civil war, it could have been a tourism haven like Bangkok or Hawaii, and a logistics hub in South Asia rivalling Singapore.

As it makes its slow climb, its prospects are bright in the coming years. It enjoys a free trade pact with both India and Pakistan, so that goods and investments can flow freely in both directions. The Chinese are keen to get a foothold in the island nation, and it behooves us not to let go of our geopolitical and cultural advantage. At Kotla we had a fiasco, whereas in Colombo the pitch is just right.


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