Friday, October 15, 2010

Sri Lanka Boom Times

Tamil Tiger Peace Divided

By Christian A. DeHaemer
Thursday, October 14th, 2010

Two years ago, the Tamil Tigers of Sri Lanka were described by the FBI as “the most dangerous and deadly terrorist organization in the world.”

Over the past thirty years, they have killed upwards of 100,000 people — the vast majority of them civilian.

The list of heinous acts is long and multifaceted. Children were kidnapped and used as soldiers. The Tigers sent more suicide bombers than another other terrorist group, far surpassing the PLO. They even pioneered the use of suicide airplane attacks and bomb belts.

But on May 17, 2009, after being routed by the forces of Sri Lankan President Mahinda Rajapaksa, the Tamil Tigers (or LTTE) finally admitted defeat. The Tiger leaders were dead.

The war was over, and there were celebrations in the capital city of Colombo.

The hub of South Asia

As I write this, Sri Lanka is undergoing a massive post-war rebuilding boom.

They have deals in place with the International Monetary Fund (IMF) which limits government spending and works toward a balanced budget.

This is a deal similar to the one made with South Korea and Indonesia after their financial crisis of 1998...

South Korea iShares Index (EWY) went from 12 to 70 over the past decade; the Indonesia iShares Index (PCX) went from 22 to 90 over the past two years.

The IMF deal forces the politicians into fiscally conservative governance, as well as gives them someone to blame for the austerity.

And in most cases, the IMF has a fine track record. (Argentina is a notable exception.)

Major trade route

Sri Lanka has been on a major trade route between East Asia and the Middle East for thousands of years. It is most known for its tea, rubber, garments, and tourism.

There is a new, deep-water port terminal being built in Colombo with a $500 million investment from China Merchant Holdings.

The New York Times ranked Sri Lanka as the Number 1 place out of 31 to visit in 2010.

There will be several new business opportunities going forward in real estate, business process outsourcing, banking, timber, pepper, fisheries, education, health care, and infrastructure.

In other words, buy the hotels, cement makers, and the banks.

For example, Seylan Bank Plc. (Colombo: SEYB) reported that profits have risen 295% in the latest quarter.

The share price has tripled this year. The exchange as a whole is up 110% this year.

Last year, the Colombo Stock Index rose 120% — just edging out Mongolia.

GDP growth

For most of the 2000s, GDP Growth in Sri Lanka was running at 6%. In 2009, in the aftermath of the global bust, it contracted to 3.5%.

But so far this year — as the rebuilding gets underway and investors flood into the market — GDP growth is running at 8% for the first two quarters of 2010.

The IMF is projecting a seven percent growth rate in 2010, but will soon revise higher.

Brian Aitken, IMF Mission Chief for Sri Lanka said, "Our latest projection came before the second quarter data and we would reevaluate our projections this November or December when the mission next visits Sri Lanka. The second quarter growth was very positive and higher than what we expected.”

Sri Lanka has an income per head of US$4500, which is behind its neighbors (including the Maldives), but ahead of India. In fact Sri Lanka has a more educated workforce, less bureaucracy, and is about half as expensive than India.

And investors are flooding in.

Recently, Sri Lanka raised a billion dollars for ten-year government bonds at 6.25 percent — lower than the 7.4 percent paid for a $500 million five-year issue last year. The offer was oversubscribed 6.3 times.

Buying the crisis

The biggest gains you can get from any market is after a crisis ends, is resolved, or an era passes. This has been proven time and time again.

You've seen this in Colombia after the drug cartels. In Brazil, South Korea, Russia, Indonesia, Kazakhstan, Mongolia, East Timor, Poland, New Zealand and others...

Free government, free markets, and an educated population coupled with new hope equals a boom in equities.

The truth is that free trade and limited government have pulled more people out of poverty than any other system — and certainly more than any well-intentioned welfare state program.

Tigers are dead

As fighting raged on, most foreign investors avoided Sri Lanka. Competition was scarce.

Those investors who have been quick to move in over the past year will benefit the most.

The CIA fact book estimated that the country has a GDP of $41 billion, with a purchasing power parity of $96 billion.

The market capitalization of the stock market is around $16 billion with a P/E ratio of 25. This is a bit high compared to the rest of Asia (India, for example, has an average P/E of about 12); but you have to take into account the growth prospects.

I'm not a buyer — yet... But the country deserves watching.

Yesterday, market trading was halted after it fell 5% and triggered safety switches. Last night, they traded down another 5.7% before closing in the green.

This is clearly a frontier market and not for the proverbial widows and orphans.

That said, Sri Lanka is a place to put on your watch list.


Christian DeHaemer
Wealth Daily

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