Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Thematic (Sector/Industry)

President Maithripala Sirisena pulled off a constitutional coup by dismissing PM Ranil Wickremasinghe on 26th October, replacing him with former President Mahinda Rajapakse. Wickremasinghe claims to still command a majority in parliament, and has questioned Sirisena's constitutional right to dismiss an elected prime minister. The 19th amendment to the constitution (passed in April 2015) says a prime minister cannot be dismissed as long as his cabinet is functioning and he has not resigned -- although prior to that amendment, the president did have the right to appoint the prime minister. There is now a constitutional impasse, but Sirisena has "prorogued" parliament (postponed the next sitting) until 16th November, to give Rajapakse more time. While the Sri Lanka economy grew much more strongly during the Rajapakse years, that growth was accompanied by fiscal profligacy -- and widening twin deficits. The fiscal deficit reached 9.9% of GDP in 2009 (and was 7% of GDP in both 2008 and 2010), and it was still 7.6% of GDP in 2015 (the year that Rajapakse lost the presidential election). The current account deficit peaked at 9.5% of GDP in 2008, but was still 5.8% of GDP in 2012 before being reined in. This year, higher oil prices caused the current account deficit to widen sharply -- to an estimated 4% of GDP in 1H 2018 (from 2.6% in 2017). The emerging market currency sell-off spread to the LKR too, with a 10% depreciation in the last 2 months (September-October); attempts at defending the currency proved futile, and Sri Lanka's foreign reserves fell to US$6.35bn in Sept 2018 (just over 3 months' import cover). The Wickremasinghe government took a US$1.5bn EFF loan from the IMF in June 2016, which required some fiscal and monetary austerity. That has contributed to an improvement in the macroeconomic balances, with inflation down to 4.3% YoY in September (and 3.1% in October 2018), while the policy interest rate remains at 7.25%. Real GDP growth, however, has remained anaemic at 3.7% YoY in 2Q 2018. The prospect of an improvement in 2H 2018 (expected by the IMF) was jinxed by the currency sell-off. With the fiscal deficit remaining stubbornly high (5.5% of GDP last year, likely still above 5% this year despite a primary surplus), the public debt is still a lofty 78% of GDP. Keeping the IMF onside remains essential to Sri Lanka's near-term economic prospects. Rajapakse's poor human rights record is thus likely to prove a near-term obstacle, with the IMF likely to be much more wary of dealing with him than with Wickremasinghe. However, the Rajapakse-Sirisena combine will be formidable when a general election is called. We recommend that investors stay wary of Sri Lanka, but reduce their Underweight position once the dust of the current constitutional crisis settles.

President Maithripala Sirisena pulled off a constitutional coup by dismissing PM Ranil Wickremasinghe on 26th October, replacing him with former President Mahinda Rajapakse. Wickremasinghe claims to still command a majority in parliament, and has questioned Sirisena's constitutional right to dismiss an elected prime minister. The 19th amendment to the constitution (passed in April 2015) says a prime minister cannot be dismissed as long as his cabinet is functioning and he has not resigned -- although prior to that amendment, the president did have the right to appoint the prime minister. There is now a constitutional impasse, but Sirisena has "prorogued" parliament (postponed the next sitting) until 16th November, to give Rajapakse more time. While the Sri Lanka economy grew much more strongly during the Rajapakse years, that growth was accompanied by fiscal profligacy -- and widening twin deficits. The fiscal deficit reached 9.9% of GDP in 2009 (and was 7% of GDP in both 2008 and 2010), and it was still 7.6% of GDP in 2015 (the year that Rajapakse lost the presidential election). The current account deficit peaked at 9.5% of GDP in 2008, but was still 5.8% of GDP in 2012 before being reined in. This year, higher oil prices caused the current account deficit to widen sharply -- to an estimated 4% of GDP in 1H 2018 (from 2.6% in 2017). The emerging market currency sell-off spread to the LKR too, with a 10% depreciation in the last 2 months (September-October); attempts at defending the currency proved futile, and Sri Lanka's foreign reserves fell to US$6.35bn in Sept 2018 (just over 3 months' import cover). The Wickremasinghe government took a US$1.5bn EFF loan from the IMF in June 2016, which required some fiscal and monetary austerity. That has contributed to an improvement in the macroeconomic balances, with inflation down to 4.3% YoY in September (and 3.1% in October 2018), while the policy interest rate remains at 7.25%. Real GDP growth, however, has remained anaemic at 3.7% YoY in 2Q 2018. The prospect of an improvement in 2H 2018 (expected by the IMF) was jinxed by the currency sell-off. With the fiscal deficit remaining stubbornly high (5.5% of GDP last year, likely still above 5% this year despite a primary surplus), the public debt is still a lofty 78% of GDP. Keeping the IMF onside remains essential to Sri Lanka's near-term economic prospects. Rajapakse's poor human rights record is thus likely to prove a near-term obstacle, with the IMF likely to be much more wary of dealing with him than with Wickremasinghe. However, the Rajapakse-Sirisena combine will be formidable when a general election is called. We recommend that investors stay wary of Sri Lanka, but reduce their Underweight position once the dust of the current constitutional crisis settles. 

Constitutional Coup Could Pave the Way to Faster Economic Growth Despite External Debt Challenge

Frontier and emerging markets (Vietnam)

Dylan Waller

This insight covers the risks and improvements of the Sri Lankan economy, focusing on Q2 performance, as well as historical economic indicators.  Some key highlights are as follows:
1) Inflation has stabilised in the mid single digits, remaining close to the IMF’s target of 5%.
2) Sri Lanka's twin deficits have been improving ( supported by fiscal consolidation efforts, growth in exports/tourism, etc.), though new measures will strain certain sectors of the stock market.
3) Foreign exchange reserves have been growing some this year, after declining in 2016 and 2017, and remain at a relatively attractive level.
4) The Sri Lankan economy grew by 3.7% during Q2 2018, which was the highest growth experienced since Q4 2016.  Notably, the agriculture sector recovered after contracting in 2017, and the services sector grew the fastest ( led by telecommunications and financial services).
5) Total export revenue during 6M 2018 rose by 6.2% YoY, led by the strong performance of textile and garment exports to the EU, US, and other markets.
6) The current stock market discount is somewhat attractive, and makes it worthwhile to consider certain stocks/sectors for investment ( will cover this more in future insights).  However, fiscal consolidation efforts and the relative slowdown in the economy makes it crucial to be picky and find attractive bottom up names.

This insight covers the risks and improvements of the Sri Lankan economy, focusing on Q2 performance, as well as historical economic indicators.  Some key highlights are as follows:
1) Inflation has stabilised in the mid single digits, remaining close to the IMF’s target of 5%.
2) Sri Lanka's twin deficits have been improving ( supported by fiscal consolidation efforts, growth in exports/tourism, etc.), though new measures will strain certain sectors of the stock market.
3) Foreign exchange reserves have been growing some this year, after declining in 2016 and 2017, and remain at a relatively attractive level.
4) The Sri Lankan economy grew by 3.7% during Q2 2018, which was the highest growth experienced since Q4 2016.  Notably, the agriculture sector recovered after contracting in 2017, and the services sector grew the fastest ( led by telecommunications and financial services).
5) Total export revenue during 6M 2018 rose by 6.2% YoY, led by the strong performance of textile and garment exports to the EU, US, and other markets.
6) The current stock market discount is somewhat attractive, and makes it worthwhile to consider certain stocks/sectors for investment ( will cover this more in future insights).  However, fiscal consolidation efforts and the relative slowdown in the economy makes it crucial to be picky and find attractive bottom up names.

Sri Lanka Economic Update: IMF Led Economic Reforms Continue/Growth Is Still Lagging Behind 4%

Investing in high growth Asian frontier economies., Asia Frontier Capital

Scott Osheroff

Investing in high growth Asian frontier economies.

Asia Frontier Capital

Asia Frontier Capital Ltd. is a pioneering fund management company based in Hong Kong that specializes in investing in high growth Asian frontier economies by managing the AFC Asia Frontier Fund , AFC Iraq Fund and the AFC Vietnam Fund.

The AFC Asia Frontier Fund invests in public equities of Asian frontier countries that are seeing increasing consumption due to favorable demographic trends, rising incomes and high GDP growth. The fund invests in listed equities of companies that have their principal business activities in Bangladesh, Bhutan, Cambodia, Iraq, Laos, Maldives, Mongolia, Myanmar (Burma), Nepal, Pakistan, Papua New Guinea, Sri Lanka and Vietnam. The AFC Asia Frontier Fund is positioned to take advantage of the continuing economic shifts in these countries and offers high returns combined with significant diversification opportunities. This fund is directed by the founder and CEO of Asia Frontier Capital, Thomas Hugger, who has been investing in frontier markets across Asia and Africa for more than 20 years.

The AFC Iraq Fund was launched on the 26th June 2015 and aims to achieve long-term capital appreciation for investors by capturing value and growth potential in the post conflict high-growth & resource rich Iraq market. The fund emphasises long term investment horizon to truly capture the opportunity in Iraq. The fund's investable universe consists of locally listed companies that have their principal business activities in Iraq as well as foreign listed companies that have the majority of the business in Iraq as a whole including the prosperous Kurdish Region of Iraq (KRI). The AFC Iraq Fund offers access to investments in post conflict recovery potential of Iraq, including the KRI, and/or stability in its territory. The AFC Iraq Fund is managed by Asia Frontier Capital (Iraq) Limited, Cayman Islands under the executive leadership team of Thomas Hugger (CEO & Fund Manager) and Ahmed Tabaqchali (CIO) who have more than 47 years of investment experience as well as an extensive background covering global, emerging, frontier and MENA markets.

The AFC Vietnam Fund invests exclusively in listed Vietnamese equities to capture value in growth companies with a focus on the small to medium size companies. This market segment offers a unique investment opportunity as the valuation gap between large- and small-cap stocks in Vietnam is presently much wider than in comparable neighboring markets and the valuations are significantly depressed versus their regional peers. The fund adopts a fundamental-quantitative approach and employs an in-house earnings model to identify attractive companies where we see high growth opportunities. In conjunction with targeting the maximum upside potential the portfolio has been structured to mitigate corporate government and liquidity risks. The fund invests in a diversified portfolio of 70-90 attractively valued companies to carefully control concentration risk.  This approach allows the fund to sell, or buy, positions without having a significant market impact. The fund is directed under the executive leadership of Thomas Hugger and Andreas Vogelsanger who have more than 50 years combined experience managing investments in frontier markets, Asia and around the world.

For more information about the fund, management team and investment strategy please contact us at info@asiafrontiercapital.com.

In line with our process of being on the ground in the countries we invest in, Senior Investment Analyst Ruchir Desai traveled to Sri Lanka in May to attend an investor conference. All photos are by Asia Frontier Capital, except where noted otherwise.

In line with our process of being on the ground in the countries we invest in, Senior Investment Analyst Ruchir Desai traveled to Sri Lanka in May to attend an investor conference. All photos are by Asia Frontier Capital, except where noted otherwise.

Asia Frontier Capital Travel Report: Sri Lanka

REAL-Economics.com

Sri Lanka appears cheap among frontier and emerging markets, trading at a P/E multiple of slightly below 11x. But its growth potential remains anaemic by comparison with emerging markets (leave alone such frontier-market stars as Vietnam and Bangladesh). Real GDP growth last year was a dismal 3.2% (with growth slumping to just 1.4% YoY in 4Q 2017), the current account deficit widened to 2.7% of GDP, and the public debt (more than half of which is foreign-currency denominated) remains close to…

Sri Lanka appears cheap among frontier and emerging markets, trading at a P/E multiple of slightly below 11x. But its growth potential remains anaemic by comparison with emerging markets (leave alone such frontier-market stars as Vietnam and Bangladesh). Real GDP growth last year was a dismal 3.2% (with growth slumping to just 1.4% YoY in 4Q 2017), the current account deficit widened to 2.7% of GDP, and the public debt (more than half of which is foreign-currency denominated) remains close to…

Sri Lanka: Political Turmoil Clouds Economic Prospects Despite Progress with IMF-Led Reform

Appeal of Sri Lanka's stock market: Opportunity to accumulate during 2018 Sri Lanka's stock market discount is appealing, though the stock market/economy are less flashy  compared to some of its South Asian and Southeast Asian peers: One appeal of Sri Lanka's stock market is the current discount to its frontier peers, as this discount should become smaller as the market recovers in upcoming years.  Sri Lanka's stock market could also be supported as larger frontier market constituents graduate to…

Appeal of Sri Lanka's stock market: Opportunity to accumulate during 2018  Sri Lanka's stock market discount is appealing, though the stock market/economy are less flashy  compared to some of its South Asian and Southeast Asian peers: One appeal of Sri Lanka's stock market is the current discount to its frontier peers, as this discount should become smaller as the market recovers in upcoming years.  Sri Lanka's stock market could also be supported as larger frontier market constituents graduate to…

Sri Lanka in 2018-2019: Improved Macroeconomic Picture to Support Discounted Stock Market

Sri Lanka

John Keells Holdings PLC is a diversified business operating in Sri Lanka.  The Group's businesses include food and beverage, transportation, tea and rubber plantations, tour operations, hotel ownership and operations, share broking, investment banking, computer hardware and software services, breeding of fresh water fish, domestic and international trade, and property development.

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John Keells Holdings (JKH SL)

Constitutional Coup Could Pave the Way to Faster Economic Growth Despite External Debt Challenge

President Maithripala Sirisena pulled off a constitutional coup by dismissing PM Ranil Wickremasinghe on 26th October, replacing him with former...

Prasenjit K. Basu

Sri Lanka Economic Update: IMF Led Economic Reforms Continue/Growth Is Still Lagging Behind 4%

This insight covers the risks and improvements of the Sri Lankan economy, focusing on Q2 performance, as well as historical economic indicators. ...

Dylan Waller

Asia Frontier Capital Travel Report: Sri Lanka

In line with our process of being on the ground in the countries we invest in, Senior Investment Analyst Ruchir Desai traveled to Sri Lanka in May...

Asia Frontier Capital

Sri Lanka: Political Turmoil Clouds Economic Prospects Despite Progress with IMF-Led Reform

Sri Lanka appears cheap among frontier and emerging markets, trading at a P/E multiple of slightly below 11x. But its growth potential remains...

Prasenjit K. Basu

Sri Lanka in 2018-2019: Improved Macroeconomic Picture to Support Discounted Stock Market

Appeal of Sri Lanka's stock market: Opportunity to accumulate during 2018Sri Lanka's stock market discount is appealing, though the stock...

Dylan Waller

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