Sri Lanka Seeks to Boost Stock Trading With India

Feb. 5 (Bloomberg) -- Sri Lanka, whose benchmark stock index surged 20 percent this year on prospects the nation’s civil war may be ending, is in talks to form an alliance with an Indian equity market to help bolster trading.

Regulators aim to start trading in derivatives by the end of the year, Channa de Silva, director general of the nation’s Securities and Exchange Commission, said in an interview. Sri Lanka also may offer a stake in the island-nation’s bourse to the National Stock Exchange of India Ltd., de Silva said.

Sri Lanka’s $5.2 billion exchange, Asia’s smallest, is counting on an end to the 26-year civil war to draw back investors to its $32 billion tea and textile-exporting economy. President Mahinda Rajapaksa said in his Independence Day speech yesterday that the country will defeat the rebel Liberation Tigers of Tamil Eelam within “a few days.”

“The conflict is on the verge of ending, and that will result in huge economic potential,” de Silva said in a telephone interview yesterday. “Sri Lanka is so small, even if it gets $10 billion, this market will just run, and this amount is petty cash for foreign investors.”

The National Stock Exchange said in an e-mail that it wouldn’t comment.

‘Good Quality Companies’

The gains in Sri Lanka’s benchmark index, the best performer this year among 90 tracked by Bloomberg, came as a military offensive drove Tamil rebels to an area less than 300 square kilometers (120 square miles) in the northeast. Daily trading during the rally was 132.2 million rupees ($1.2 million), less than a third of the average over the previous three years.

“Sri Lanka has a number of good-quality companies, it has fantastic natural resources with everything from tourism, tea plantations, and ports and logistics potential,” said David Gait, a fund manager at First State Investment Management Ltd., which manages $15 billion in emerging market equities. “Still, it sits on the higher risk spectrum among emerging markets.”

Gait said by phone yesterday his funds remain invested in Sri Lankan companies including John Keells Holdings Ltd., which has the third-highest weighting on the key index, and has no immediate decision on adding to those holdings.

The rally in Sri Lanka so far has drawn mainly local investors and funds, said Gavin D’Rosairo, who oversees assets worth 24 billion Sri Lankan rupees ($210 million) at Eagle NDB Fund Management Co., one of the nation’s largest money managers. That raises the concern that the rally will falter as signs of slowing economic growth overwhelm optimism spurred by the government’s victories in the civil war.

‘Set to Implode’

“Even if large-scale military confrontations end soon, the economy is set to implode from the impact of the global recession on exports,” Sisira Jayasuriya, a professor of economics and Sri Lanka specialist at La Trobe University in Melbourne, said in an interview Jan. 30. “Business confidence is at rock-bottom.”

Gross domestic product expanded 6.3 percent in the quarter ended September, down from 7 percent in the previous three months, on falling exports of tea, rubber and textiles, the statistics department said Dec. 16. The economy will expand by between 5 percent and 5.5 percent this year, according to central bank estimates.

Boutique hotel operators including Pegasus Hotels of Ceylon Ltd. and Eden Hotel Lanka Ltd. are among the 10 biggest gainers this year. Dialog Telekom Ltd., the nation’s largest mobile- phone company and a unit of Malaysia’s TM International Bhd., and Tokyo Cement Co., partly owned by Japan’s Mitsui Mining Co., are among the largest decliners.

Cushioning the Recession

The country also unveiled a 16 billion-rupee stimulus package on Dec. 31 to help ease the economic crunch. The expected spending after the war boosted shares of construction- related stocks, including Lanka Cement Plc, which doubled this year, and Alufab Ltd., which gained 90 percent.

“A chunk of the budget could be spent on rebuilding the country, the north in particular, which economically could cushion the effects of a global recession,” said Hugh Young, managing director at Aberdeen Asset Managers Ltd.’s Asian unit, which oversees $37.3 billion, including Sri Lankan shares. “All that, at the moment, is rather wishful thinking.”