Ceylon Daily News - 11.06.2008


Good governance critical for vibrant stock market

Hiran H. senewiratne

The stock market is a good indicator of confidence that investors have on a particular company, industry and more so on the country, Managing Director/CEO of First Guardian Equities, Rohan Goonewardene said.

He said that investors pay higher premiums when they feel that the prospects are bright and sustainable.

Therefore, while directors and the management are themselves responsible for the attractiveness of their own companies, key policy makers like the regulatory bodies and sections of government are also responsible for putting the necessary systems in place to reassure and comfort the prospective equity partners of our economy.

 

Q: What kind of business does your company engage in?

We are a licensed stock broking company dealing in stocks and bonds listed on the Colombo Stock Exchange. We like to think of ourselves as wealth managers as we don't just only buy and sell on behalf of our clients, but also advice them on portfolio strategy and portfolio mix to meet their specific investment goals.

The discerning investor seeks more than order execution and invests based on sound fundamental and technical research and that is what we provide.

We commenced business in October 2006, and we are proud to say that First Guardian Equities is the only Stock Broking Company in Sri Lanka with an International Systems Standardisation Certification ISO 9001-2000 awarded by Moody's of UK.

These high levels of service we provide our clients is largely due to a dedicated staff that persistently fulfils the challenging service excellence requirements of our shareholders Guardian Equity, the Hirdaramani Group, Raj Rajaratnam and S.K. Wickremesinghe, as well our Independent Directors B.R.L. Fernando and Ranil Pathirana.

 

Q: Do you think that the Stock Market in Sri Lanka is a good indicator to determine economic development?

Yes and no. Although there is some representation of almost all major sectors of the economy in the stock market, like telecom, banking and finance, plantations, manufacturing, leisure sector etc, there are altogether only around 250 companies listed in total.

The largest employer in the country which is the agricultural sector is largely in private smallholders hands. Industries that have seen significant wealth creation in the past five to ten years namely the apparel, BPO, IT, media are yet to be represented in the stock exchange in a tangible manner.

Sectors like power and energy, food and agriculture and infrastructure development which are most likely to be growth industries for the next decade or so are yet to make their presence felt on the bourse.

For any country to develop it has to have a pricing mechanism for its goods and services and access to capital markets. The stock market as part of its role provides that mechanism and is therefore integral to any country's development plan. If the private sector is to be at the forefront of the nation's development strategy, then the capital markets should be the reformed as a priority.

 

Q: What would attract companies to list on the Stock Exchange?

Companies that are in private hands need to be made to understand the benefits that derive from a listing. One is that there is readily available capital for growth and expansion.

The other is the ability to draw professional management to their work force as young professionals entering the work place would prefer to work for established names. Professionals are concerned about image and where they work matters to them.

Also employee share option schemes make it attractive for them to join a company. In the developed world and even in India and China, ESOPs play a large role in attracting, retaining and compensating the best talent.

Then there is the exit option. Very few businesses have stayed in the hands of the founder's progeny. One can only think immediately of the Tata's of India and the Wallenberg's of Sweden, in which the founder's descendents continue to own and manage the business.

General Electric was founded by Thomas Alva Edison but it is in the hands of the public shareholders and is managed by professionals. So the equity market is a good mechanism for price discovery in the event the original promoters desire to dispose of a business.

Further companies that are listed have immediate recognition and acceptance when marketing their products or services.

Globalisation has a tendency to reward transparency and this would be a key competitive advantage in the market place.

 

Q: How can the younger generation be encouraged to invest in the stock market?

The concept of saving and investing has to be taught from an early stage. Basic fundamentals of investing, is vital not only for bankers and accountants etc as many believe, but for anyone who has a desire to create wealth and preserve it effectively to improve their lifestyles and financial security.

As for me personally, I was introduced to the share market at the age of 10 with the guidance of my father and a benevolent uncle who gifted me some CIC stock. The dividend from those shares was the initial capital I had to invest in the market.

My initial training on investing was very simple yet effective. I was taught to calculate Net Asset Values Per Share(NAV/PS) and Earnings Per Share (EPS) based on information from a handbook of Rupee companies given to me by my father and then compare those with their respective market prices, Stocks which were below their NAV and the ones with the lowest Price Earning Ratios (PERs) were short listed on a piece of paper.

Then supposedly came the more difficult part of investing, picking the best stocks. However, for a 10 year old boy in 1983, it was a 'no brainer'. Elephant House had the best hotdogs, milk, icy chocks, meat products and soft drinks.

To date, in my entire career, there couldn't have been a quicker investment decision I've made. All my money was going on Cold Stores, the owning company of Elephant House and nothing else. Ariyaratnam my father's stock broker and friend very kindly purchased 50 shares at Rs 8/- each into a joint account I opened with my mother.

To be fair, I do recall him warning my father about some labour union problems in the company. I recall it; solely because it was the very first time I'd heard the words 'labour union'! But nothing could change my 10 year old mind which was filled with thoughts of hotdogs and ice creams.

Although, the hot dogs did seem to taste better as a stakeholder, the stock started to slide and my Rs.400 investment was being gnawed away with each passing day to my absolute horror. The worse was still to come. A few months later the company was suspended and it seemed I lost everything. At 10, I unwittingly learnt another very important lesson; to spread and diversify one's investments and the risks associated with them. It was a shattering experience.

Of course, several years later the stock recommenced trading on the CSE and traded at about 25 times the price I paid for them!

 

Q: What is your suggestion to make a vibrant stock market in the region?

The Fund management industry has to be greatly encouraged. We have tremendous talent in the country but the necessary systematic upgrading of skills, exposure and incentives are not provided.

If the huge public captive funds which are controlled by the government were to invest a reasonable portion of their funds systematically on the stock exchange, in the best managed private entities operating in the most potential lucrative sectors of the economy, it will most certainly fuel tremendous confidence in the markets and instigate a surge in domestic and foreign investment participation.

Furthermore we need to develop a market for derivatives, short selling, commodities, Exchange Traded Funds which will offer investors more options to benefit not only when the market is going up but even when the market comes down and these will also help attract more liquidity.

In small illiquid market, large investors pay high liquidity costs when entering or exiting a market and that is one more reason why many of the large funds are reluctant to enter this market in a big way.

 

Q: In what way should we improve the quality of stockbrokers in the country?

I would prefer the term financial advisors, individuals who are professionally trained in all aspects of investment management and are knowledgeable enough to advice clients to make holistic investment decisions.

The investing public has a wide range of needs; paramount of them all is the need to safeguard their hard earned capital. Capital erosion takes place in two forms, investments that result in loss of capital; the other is inflation which eats into the real value of money.

A stockbroker has to not only maintain the nominal value of the investment; he also has to maintain the real value of capital.

Thus it requires specialisation, which will come with education, training, and experience.