Sri Lankan Crisis, Luck Vs Skill in Investing, FPI Selling Spree & More

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• Economics: What’s happening with Sri Lanka’s economy?

• Psychology: The game of Luck Vs Skill in investing

• Behavioural Finance: You can’t win the game of speculation

• Data Speaks: Foreign Participants on a selling spree of Indian stocks

• Ask Capitalmind: Ask us and we’ll answer it in next week’s newsletter

So Sri Lanka & So much trouble! 🌴

On Aug 31st 2021, Sri Lanka’s president Gotabaya Rajapaksa declared an economic emergency in the country. They were facing a severe food shortage. Pandemic killed tourism which further crippled the economy.

The country’s inflation has reached 12% from 4% less than a year ago.

• The forex reserves have dropped from over $7.5 Billion in 2019 to around $1.5 Billion.

• The Sri Lanka rupee had depreciated 10.4% in the last year against the US dollar.

• It has to pay $4.5 billion to service its sovereign bonds in 2022 & the country is struggling to pay interest.

Is the country is on the verge of bankruptcy? What is happening in this island neighbour of ours?

How did the crisis start?

Many factors have led to the current economic situation in Sri Lanka. Sri Lanka is heavily dependent (10% of GDP) on tourism for its economic growth & forex reserves. Needless to say, this was impacted due to the Covid pandemic.

The crisis was further aggravated after they banned the use of chemical fertilizers in farming. This is as per the President’s vision to make Sri Lanka the first country in the world to go 100% organic. Clearly, he didn’t take into account the basic economics of framing and this move backfired big-time impacting the production of food & other essential goods.

Since 2005, Sri Lanka borrowed ~$5 Billion from China. In 2017, unable to repay $1.4 billion debt, handed over Hambantota port to China on a 99-year lease.

Today, China is Sri Lanka’s fourth-biggest lender, behind International financial markets, the Asian Development Bank, and Japan. China accounts for about 10% of Sri Lanka’s total ~$50 Billion foreign debt.

Will Sri Lanka collapse?

In most probability, no. They’ll sail through. Much of the stability of the subcontinent rely on Sri Lanka not falling apart.

They are looking for a bailout from all possible sources. In Jan 2022, India announced a $ 900 million loan to Sri Lanka. It also received $787 Million in aid from IMF. Even Bangladesh offered a $200 million loan to the country.

Among all, Sri Lanka relied mostly on China for help. Not surprisingly, the Chinese government happily agreed to lend another ~$400 Million, restructure current loans and provide concessional terms for its exports to Sri Lanka. They have their own agenda in the Indian Ocean.

In the long run, this can lead to political uncertainty. But, that’s a discussion for some other week.

Luck Vs Skill in Investing 🎲 🎯

Luck plays a role in all our outcomes. We know this intuitively. But except at the extremes, we don’t know how much it drives any given outcome. You could place any activity and its outcome on a continuum from pure luck to pure skill.

Winning the lottery is clearly based on Luck. Luck, however, won’t help you beat Magnus Carlsen at chess or Novak Djokovic, vaccinated or not, on a tennis court. That needs Skill—lots of it.

Three analytical quizzes come to mind that help explain this further. We’ve covered all three in our latest wealth letter to our PMS clients -

• Monty Hall with Cars and Goats

• Anil, Beena, and Joseph look at each other

• The Unfaithful Husband Problem

Read - The game of luck is also a game of skill

How far does speculation get you? ⏳

These are crazy times. People keep scouting for higher returns - thanks to astronomical returns from crypto and raging stock markets. Higher returns are sought out by taking higher risks by investing in super speculative asset classes. Here, the selling point itself is risk and volatility.

(schadenfreude: a German word for taking pleasure at another’s misfortunes)

Would you bet everything you have to realize the dream of having everything?

Read - Speculation: A Game You Can’t Win

FPI’s selling like there’s no tomorrow 💸

Foreign Portfolio Investors sell over 28,000 cr. in January 2022. After 2018’s 30,000 cr. this is the second biggest exit since 2008 (assuming the entire year ends this way, I know it’s young)

Deepak Shenoy keeps an observant eye on these numbers. Follow him on Twitter for more.

Ask Capitalmind💡

In this section, we answer your questions on investing and personal finance. Each week we will pick one interesting question and answer it for you.

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