Increasing EPF and ETF equity investments will benefit many says Almas Holdings Group Chairman Imtiaz Buhardeen

If Sri Lanka’s prominent funds, such as the Employees’ Provident Fund (EPF) and Employees’ Trust Fund (ETF), could invest at least 20% of their funds in the equities market, it could generate higher returns to the fund than fixed income while improving market liquidity and capitalisation, making it attractive for domestic and foreign investors, Almas Holdings Group Chairman Imtiaz Buhardeen said in an interview with the The Sunday Morning Business.

He said that the Colombo Stock Exchange (CSE) had moved up by 145% since the start of the economic crisis in April 2022, as listed companies benefited from high inflation, import restrictions, and currency fluctuations, providing them abnormal profits.

Buhardeen noted that the stock market had given the highest returns when compared to other asset classes in Sri Lanka, adding that people had failed to understand wealth creation in the stock market.

Following are excerpts:

How do you view the performance of the equities market so far this year?

In general, the market has been flat and it is consolidating at the moment, after a significant gain of about 50% experienced in 2024. The turnover levels have also decreased. The turnover was about Rs. 130-140 billion in December 2024 and January. By February, it had come down to about Rs. 58 billion and it has been at Rs. 15 billion during the first 10 days of March.

One of the reasons for this phenomenon is that there were many dividends that were announced during February and March, with dividends amounting to about Rs. 65 billion including banks and reaching a total of about Rs. 85 billion with scrip dividend. Some of these will be going into ex-dividend dates which is likely to be followed by people selling their shares the next day. This has been happening, which is why the market is coming down on ex-dividend dates.

Additionally, foreign sales have been continuing, and in the first two months of the year, we have already seen about Rs. 10 billion in foreign outflow. 

Was the market expecting certain things from the Budget and how did the market react to it?

Just before the Budget, there was speculation regarding a possible capital gains tax for shares, which resulted in a slight decline in the market. However, immediately after the Budget was presented, the market witnessed an immediate rise. 

In fact, the market hit an all-time high of 17,200 points in the main index, but other than that, we did not identify any major tax increase accounting for the rise in the market. This was because most increases in taxes had been implemented or announced prior to the Budget, and had thereby been factored in by the market already.

The market did not react excessively to the Budget. However, subsequent to the Budget, the market has been in decline. Within the last three weeks, we have witnessed a drop of about 1,200 points, which is a decline of about 7%. 

It is very difficult to attribute a reason for this drop, but certain factors such as the uncertainty in the country in the aftermath of the shootings and killings that happened in the past few weeks could have contributed to it.

I cannot identify the main reason for the fall. It is just that some profit-taking is taking place accompanied by some consolidation that would allow new investors to come in later.

It appears that the market confidence in the National People’s Power (NPP) Government grew after the election in September. Is this ongoing or has it peaked?

When comparing the first nine months of last year with market numbers for December 2023, by the end of the latter month, the main index was at around 10,650 points, whereas around mid-September 2024, it was at 10,600. This signifies the fact that the market had hardly moved despite fluctuations. 

Just before the Presidential Election, the market dropped by about 1,000 points, and upon the expectation that a NPP Government would be installed, some of the funds also started selling. Thereafter, however, as soon as the election ended with the victory of the Anura Kumara Dissanayake Government, the market started to perform well, which trend continued after the General Elections as well. 

The market rose by about 50-55% thereafter, reaching many all-time highs before finally reaching a value of 17,200 by 17 February. 

One of the reasons for this was the Government’s continuation of the policies of the International Monetary Fund (IMF) without many changes being introduced. The Government maintained some of the key figures in their positions and continued with debt restructuring, ensuring confidence and stability. 

Additionally, investor sentiment improved drastically for the market, and alongside that, market and company fundamentals improved as well. At the moment, the market has not peaked but is in a state of consolidating itself. Company earnings have increased by almost 20% Year-on-Year (YoY) over the last quarter to Rs. 260 billion while it is at an all-time high of about Rs. 730 billion for the entire year. 

The current market Price-to-Earnings Ratio (P/E) is around 8.8, but the CSE has not adjusted the ratios yet. Once that is completed, I think it will fall below 8. The market is still undervalued compared to the region or the historical range of around 12-15 market P/E, which means there is still a great deal of potential for the market, and even an increase of 50-80% can be considered feasible, which would allow it to reach the aforementioned historical range. 

What role did the capital market perform during the economic crisis and how will this change amidst the ongoing economic resurgence?

During the economic crisis, the market went through some of its worst times. Just before the crisis in January 2022, the index hit an all-time high of 13,500. Since then, the market corrected itself following the default. 

Around the middle of 2022, the market declined to a level of about 6,900 points, which was quite a sharp correction. Since then, it has started to rise slowly. By the end of 2022, it stood at around 8,700 points; by the end of 2023, it had risen to approximately 10,700 and the end of 2024 saw it reach 16,900.

To reach 16,900 from the crisis level of 6,900, the market has moved up by almost 145%. Within that period, the currencies were fluctuating, inflation rose and fell, and there were many import restrictions, which allowed certain companies to benefit.

Overall, the country was going through a difficult period, but at the same time, some listed companies made abnormal profits.

Now, with most of the restrictions and instability having ended, companies continue to generate abnormal profits. For instance, the last quarter’s profits are among the highest recorded. Banks made profits due to International Sovereign Bond (ISB) restructuring as they wrote back on some of the provisions that had been made. 

In the previous calendar year, the companies made about Rs. 730 billion in profit. The fall in interest rates and electricity prices at present allows companies to expand and improve their businesses. As long as there is not much instability in the country, companies will keep performing.

The entire economy was somewhat closed for a while and now since it has fully opened up, there are more opportunities for companies to expand and benefit from. 

What are your expectations from the market for the rest of the year? Are there any forecasts you would like to share?

There are a few areas that, if improved by the Government, would result in a change in market sentiments, leading to a very positive direction for the market as a whole; for instance, the increase in credit ratings, with the IMF being satisfied with the direction of the Government as articulated in the Budget as the fund releases its fourth tranche. 

Another expectation is that S&P is waiting to upgrade Sri Lanka’s credit ratings. It is anticipating SriLankan Airlines loans being rescheduled, which is expected to take place soon. Once this takes place, an upgrade can be expected as well.

More importantly, the EPF, the ETF, and Sri Lanka Insurance have not been active in the market for a while now, whereas the total value of their funds amounts to almost Rs. 5 trillion. If at least about 20% of this amount can be invested in the stock market, it would allow for a much better return than the fixed income. 

As of now, market liquidity and market capitalisation are insufficient. In order to grow the market and for foreigners to be interested in investing in Sri Lanka, market capitalisation and liquidity must increase. If they increase, significant amounts of foreign funds can enter the market.

However, local funds, such as the EPF, have not invested for the last 10 years. They are holding back on account of three or four bad investments made about 10 years ago. The investments that they made during that period resulted in losses of approximately Rs. 9 billion. However, now that the entire market has risen by 50%, a Rs. 1 trillion investment could easily result in a profit of Rs. 500 billion. The misjudged investment made by the EPF, which resulted in a loss of Rs. 9 billion, has itself yielded a profit of Rs. 144 billion as of 2024.

Historically, we have reached a P/E ratio of about 12-15, with even the peak market of 2022 having a ratio of around 15. If the market can go back to a ratio of 15, it would imply a doubling of the index from its current level of 16,000 to approximately 30,000-32,000. Although I am not suggesting rapid changes to this effect, the market nevertheless embodies this potential.

The Budget contains plans to list State-Owned Enterprises (SOEs) in the CSE, with the plan having been in the discussion stage for a while. What is your opinion on this?

The first thing that must be determined is whether the Government should run certain businesses or not, whether it should refrain from engaging in certain businesses, and whether it should be formulating certain policies and implementing them. 

At the moment, there are approximately 570 institutions under Government purview. While it is sufficient that a handful of these are retained within Government control, the remainder should be privatised, merged, or closed down, as they were creating losses of about Rs. 700-800 billion per annum.

If such institutions are to be privatised, I am certain there will be foreigners and locals who will be interested in acquiring them and contributing to their enhanced performance, resulting in greater accountability and transparency as well as better products or services. If some of these institutions are sold or partly privatised, the funds can be channelled towards a reduction in national debt levels and to cover interest costs.

On the investor side, if SOE reforms reach the market, our market capitalisation will increase significantly with more investors and foreigners entering the market, which can be expected to provide a significant boost all around.

Why are new businesses not interested in going public? Is it because there are not many incentives provided to them? 

In 2021, tax incentives of 50% were provided for companies that were listed for a two-year period, which encouraged several companies to enlist in the market. However, this was suddenly withdrawn halfway through, while private companies have no new incentives compelling them to enlist either. 

When there are excess regulations and monitoring, some private companies will not wish to be listed without any benefits in doing so. The market should at least be in a condition of good liquidity whereby companies can raise money easily or receive a proper value for their share.

However, the market’s liquidity is not high at the moment. Even those who want to sell a larger stake of 5-10% find it difficult to do so. As said before, this is why measures to improve market liquidity and market capitalisation will have to be executed, and why it is crucial that such decisions are implemented. If the matter keeps dragging on with each successive government, nothing will happen. 

The Government can look into these matters and act on them swiftly. Once the market is vibrant, everyone will be excited and want to be in the market. But they will not be interested in entering a market that is only active in certain months. 

This is one reason why private companies do not want to enter a market without any benefits provided to them or without any attractiveness on the part of the market itself at this moment. There were about 280 companies listed on the CSE about 10 years ago, and the number remains the same, with some companies having delisted and others having taken their place; it has not grown to levels of 300, 400, or 500. 

If you take India, for instance, when the country approached the IMF in 1992, its market capitalisation stood at just INR 100 billion; it is now approximately INR 4-4.5 trillion. The stock exchange index stood at around 4,500 in 1992, whereas it stands at around 74,000 at present.

Most Sri Lankans are accustomed to fixed deposits, but the corresponding interest rates stand at only around 6-7%, and once taxes are paid on the interest, the interest income decreases to approximately 4.5%. 

People have not understood the process of wealth creation in the stock market. When considering the stock market performance over a long period of time, it has given the highest returns compared to other asset classes in Sri Lanka. People have not understood this properly, or else, it is not properly marketed.

Outside the market, how do you think the tariffs imposed by the Donald Trump administration on countries such as China would impact Sri Lanka’s listed companies?

US President Trump is initially targeting certain countries like China, Mexico, and Canada, and perhaps the European Union (EU). These are the larger countries that export to the US, and I do not anticipate a direct impact on Sri Lanka. 

Actually, it should be on the positive side; if taxes and tariffs are increased for these countries, the US will still have to import a certain amount. It will then become cheaper to import from other countries where there are no taxes or low taxes. Therefore, it should benefit countries like Sri Lanka, especially industries like garments and certain other trades.

I think things will settle down in another month or two. Internationally, certain markets fluctuate in the 7-8% range. Trump is always pro-business and I am certain he will make the markets rise once things settle down.

Source : The Morning