How Should Investors Frame Kandy Riots?

Kandy is located in the mountainous interior of Sri Lanka

Some analysts dismiss the ethnic attacks in Sri Lanka last week as a purely domestic affair. Globalists should be less cavalier. The tragedy is a sobering reflection on our collective failures; it also is a jarring reminder of headline-grabbing violence elsewhere in the developing world. The threats and emergencies that sprout from these conflicts have important implications for global business strategies.

Mob violence broke out around the central city of Kandy last week. Longstanding tensions careened out-of-control when a Sinhalese truck driver was killed by a group of Muslim men in a road-rage incident. That confrontation quickly escalated to widespread attacks on the Islamic community. Muslims represent about 10% of the Sri Lankan population, but they control a disproportionate amount of local commerce.

News reports have identified three deaths. As many as 200 Muslim homes and businesses were sacked. Eleven mosques were damaged or destroyed. The government responded by announcing a nationwide state-of-emergency and deploying military units to civilian areas. About 150 provocateurs were arrested. A judiciary board has now been appointed to investigate the breakdown of law and order.

For cross-border investors, the Sri Lankan faultline spotlights three issues that are relevant both here and elsewhere:

Emerging-Market Companies Handle Risk Nimbly

The economic disruption from the Kandy riots will likely have a greater-than-expected impact. Sri Lanka is a trade juggernaut, but its domestic economy is heavily exposed to the volatile tourism industry. Fortunately, local corporations understand this risk because of the nation’s civil-war heritage. Most have diversified activities that backstop domestic stress. As one example, John Keells Holdings, the largest company in Sri Lanka, has reach to marine logistics and information technology, among other verticals.

Social Media Plays Huge Role in Developing World

Amid the Kandy riots, the government ordered a shutdown of Facebook, WhatsApp, Instagram, and Viber to control hate speech and false news. For investors, the action emphasizes the influence of social media in the developing world, in ways that we may not completely understand in mature economies. Consumer brands, including banks, have either skipped through the brick-and-mortar phase of the business lifecycle, or avoided it altogether. Major markets are behind that curve.

Investors Generalize News to Their Detriment

Although some outside observers may think that these now-dissipated riots are a country-wide phenomena, Sri Lanka is not ablaze. The violence has been largely contained to a single region in the middle of the island. We note that the Central Province—where Kandy is located—is materially smaller in population than the Colombo metropolitan area. The dominant economic corridor on the west coast, while not immune to social friction, has largely deflected communal violence since its own flare-up four years ago.

Sri Lanka attracts boutique portfolio and direct investors. The nation benefits heavily from capital flows sourced in the Middle East and Asia. Among Western names, the market opportunity tends to be overlooked in favor of the larger stories, but Sri Lanka does stand comfortably among regional rivals. One reason that stock-market allocators, for instance, have seen comparatively strong returns is because Sri Lankan companies are heavily exposed to the cyclical uptrend in the global economy. The broad MSCI index for the country has gained 5.7% in US dollar terms since the beginning of the year, including the dip provoked by ethnic clashes in Kandy.

Our Vantage Point: Conflict in Sri Lanka, while tragic, also provides a roadmap for investors to manage their exposure to the developing world. We caution about writing off the news as merely a local matter.

Learn more at Al Jazeera

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Image: The Central Province has a population of about 2.5 million; Kandy is the largest city. Credit: Ziggymars at Can Stock Photo Inc.