Crisis Makes Sri Lankan Stocks World’s Worst Losers After Russia

(Bloomberg) -- The boom in Sri Lanka's stocks has turned to bust as a 33% slide renders the market the world's worst performer this year after Russian equities.

The Sri Lanka Colombo Stock Exchange All Share Index is tumbling as protests mount nationwide against soaring inflation and power cuts. A growing political crisis has torpedoed a market that rallied 80% in 2021 -- the world's best performance after Mongolia -- with the central bank chief's resignation on Monday further complicating the picture.

The slide in Sri Lankan shares is leading the reversal in a broader gauge of Asia's frontier-market equities after it rallied in 2021. The MSCI Frontier Asia Index has just capped its worst quarter in two years as quickening price pressures and political tumult weigh on sentiment toward these relatively illiquid markets, including Pakistan.

Sri Lanka's equities have been hit particularly hard, with losses also having triggered trading suspensions in recent days.

As inflation soars, “investors have taken a risk-off approach to investments amidst heightened uncertainty, where capital preservation has become priority,” said Naveed Majeed, senior vice president of research at Asia Securities Pvt. “We expect corporate earnings to moderate from March onwards.”

Sentiment has soured even as the government seeks a bailout from the International Monetary Fund to tackle surging in living costs and a foreign-exchange crisis. The rupee is the world's worst-performing currency this year with foreign funds withdrawing a net $11 million from local stocks, according to data compiled by Bloomberg.

Some investors see the authorities taking action to arrest the slide.

“I would not be surprised by a steep hike in interest rates above 100 basis points” at the Central Bank of Sri Lanka's next meeting, said Ruchir Desai, fund manager at Asia Frontier Capital Ltd.

Meanwhile, political turmoil in Pakistan is exerting pressure on the KSE-100 Index as Prime Minister Imran Khan called for a fresh election on Sunday after one of his political allies abruptly scrapped a no-confidence vote. The equity gauge slid the most in almost a month on Monday.

©2022 Bloomberg L.P.