Tea acts as tonic to Sri Lanka stocks war gloom

By Shihar Aneez

COLOMBO (Reuters) - After a sharp downturn earlier this year as civil war flared, Sri Lanka's stock market is recovering thanks to an unlikely tonic -- tea.

High international tea prices are boosting interest in Sri Lanka's tea and rubber plantation sector shares, which have helped reverse the stock market's 7 percent drop in January, when the government formally cancelled a truce with the separatist rebel Tamil Tigers.

With investors betting on strong quarterly results for the sector, Colombo's leading All-Share index has clawed back its losses this year and analysts say tea plantation share gains could help drive the broader market back into positive territory.

The market dipped 0.26 percent on Tuesday, and is down around 0.5 percent so far in 2008. But for the year to date, the plantation sector sub-index is up more than 21 percent.

"Because of high expectations of strong earnings in plantation shares, small investors are highly attracted," said Vajira Premawardhana, head of research at Lanka Orix Securities.

"Corporate earnings of some main blue chips are not up to the expected level. So now most investors want to recover their losses (in other shares) from plantation shares."

Sri Lanka's Tea Board said last month that despite a 2 percent drop in 2007 production, the country earned a record $1 billion from tea exports, helped by high global prices. Tea is a major foreign exchange earner along with remittances and garments.

The Tea Board said average tea prices at auction in Colombo rose more than 40 percent last year to $2.74 per kilogram. Rubber prices also rose 15-35 percent, depending on the type of rubber exported, though exports are much smaller than tea.