People in Sri Lanka are missing out on the Power of Investing Ravi Abeysuriya, CFA, Group Director / CEO of Candor said at the seminar on "Stock Market: Regulatory Framework and Investment Challenges" organized by The Ceylon Chamber of Commerce that “the Capital Market in Sri Lanka is under-owned versus its frontier market peers and as a result people miss out on a valuable opportunity to build long term savings for retirement”. He said “we have one of the lowest participation rates of domestic investors in our capital market. Although we have today around 765,000 CDS accounts (or around 583,000 when duplication due to joint accounts are excluded) a recent study has revealed that, around 350,000 are plantation worker accounts and another 100,000 are student’s accounts that are dormant. So in actual fact actively trading happens in only about 25,000 CDS accounts”. Figure 1: Domestic Investor Participation Rate in the Stock Market It was pointed out that this was largely due to lack of investor confidence and trust in our Capital Market. To restore investor confidence and attract more long term savers to the capital market he said “we need a paradigm shift in the way our investment advisors treat their clients”. He showed that whilst better regulation and enforcement of regulation is required there is empirical evidence that robust governance require a focus on ethical culture within the financial firms such as the stock brokers and asset managers. To restore trust, we need a shift towards greater integrity and accountability. We need a stronger and systematic ethical dimension. Getting back on the right path requires education and leadership that is sustained over many years. “Most importantly, it requires investors and financial leaders taking values as seriously as valuation and culture as seriously as capital”. Even Pope Francis has recently said “it is important that ethics once again play its due part in the world of finance” and that markets “serve the interests of people and the common good of humanity.” When investors do not trust the capital market, they are unlikely to save and invest for their future and achieve their long term financial goals. Sri Lanka being one of the fastest aging countries in the world, Mr. Abeysuriya stated that “there will be a massive social impact to Sri Lanka in the not too distant future unless they start investing. People will have lower quality of life and may have to work longer and will have intergenerational stress”. He said that The CFA Institute with its Future of Finance campaign is getting the message out to unite investment professionals in a commitment to place investor interests above all others. This initiative aims to create awareness about the CFA Institute “Code of Ethics & Standards of Professional Conduct”, “Asset Manager Code”, Integrity List"50 Ways to Restore Trust in the Investment Industry" and encourage the global investment community to endorse and share the Statement of Investor Rights. Which is a list of 10 rights that any investor anywhere in the world should expect from financial services providers. Mr. Abeysuriya said his favorite seven from the 50 ways to restore trust are: 1. Name and shame unethical behavior. 2. Advocate for stronger regulations that protect investors. 3. Never overlook unethical behavior because you’re better served by ignorance. 4. Bring to justice to those who take part in irresponsible and illegal activities. 5. Help clients focus on risk as much as they do on performance. 6. Strive for a conflict-free business model and 7. Act with integrity 24/7 – not just at the office! For Sri Lanka to transform our capital market to a wealth-creating opportunity we need to get some vital components right. If the investment advice is accurate & reliable, transparent and is received by everyone at the same time, the less likely it is that decisions will be made on emotion and herd instinct. All stake holders need to instill public trust in the market, market intermediaries that serve the best interest of clients, and robust regulatory standards that protect investors and advocate fair play. Similarly market liquidity has a very strong relationship with stock market growth. The price discovery mechanism will work more efficiently and market manipulations can be prevented if the liquidity of the shares traded is increased. Investors too need to be financially literate and more prudent. “When we have a blood clot in our brain we inquire about who the best, most qualified and respected Neurosurgeon is, not go to a smooth talking nearby Barber, but when investing their hard earned money most people fail to do so in Sri Lanka”. Mr. Abeysuriya, went on to say that a Government policy change is required with regard to building the capital market. We have to get Sri Lanka into the MSCI Emerging Market Index, which could be a major catalyst to attract foreign investors to our capital market. This can be achieved by listing two large profitable state institutions and establishing a public float of over 20%. USD 9.5 trillion in assets is estimated be benchmarked to MSCI indexes. When Sri Lanka is in the index, MSCI Emerging Market Index tracker funds will be required invest in Sri Lanka as they need to replicate the index. 2013 2012 2010 2008 2006 2005 2003 2001 1999 1998 1996 1994 1992 1991 1989 1987 1985 The presentation concluded by showing what people in Sri 42,679 Lanka miss out by 45,000 Real Stock Mkt. Return demonstrating the “The Power 36,614 40,000 Real Savings A/c Return 35,421 34,049 of investing” He said Rs.10,000 35,000 30,985 29,730 invested by a risk averse 30,000 investor in the NSB savings 22,023 25,000 account in 1985 will be worth 18,569 20,000 15,445 only Rs.2,379 in 2015 even after 10,625 15,000 10,000 compound interest due to loss 8,119 of purchasing power from 10,000 2,379 inflation. Whereas, the same 5,000 Rs.10,000 invested in the ASPI by a risk taker would have given him or her the ability to by Rs.35,421 worth of goods or Figure 2: Real Stock Market Returns vs. Real Savings Account Return (Net of Inflation) services in 2015 after inflation, that is 3.5 times more. However, he cautioned the risk of investing without a long term perspective as stock markets go up as well as down and therefore require the staying power to wait until the markets recover over time. He also said the potential for a prudent investor that invests in a portfolio of fundamentally sound stocks taking advice from a professional investment advisor who has the client’s interest at heart will have returns which will be several times more. Mr. Abeysuriya encouraged everyone to become financially literate, make use of the Power of investing to transform their lives and for their dreams to come true. For most people the capital market is the means to participate as an owner in the growth of the companies that make up the Sri Lanka economy. What makes it powerful is that companies are motivated to grow their businesses over time. Stock ownership is the way for individuals to participate in that growth. Of course investing takes optimism about the future opportunities. It requires investing wisely, taking a reasonable amount of risk and a long term view and most importantly getting professional help.
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