Sri Lanka’s capital market is entering one of its strongest phases in a decade, with political stability, improving macroeconomic indicators and still-undervalued equities creating what investors describe as a “rare window for accelerated growth.”
This is the view of AFC Asia Frontier Fund Co-Fund Manager Ruchir Desai, who delivered an upbeat assessment at the Sri Lanka Economic Summit organised by The Ceylon Chamber of Commerce.
Desai, who has tracked Sri Lanka alongside frontier markets such as Bangladesh, Pakistan, Vietnam, Kazakhstan and Georgia since 2014, said the country has clearly turned a corner after a turbulent 2018–2023 period.
According to him, Sri Lanka now stands out for having regained both political and economic stability the two conditions he considers most critical for long-term investor confidence.
Having increased the Fund’s Sri Lankan exposure soon after visiting the country in November 2022 — which he described as the “bottom of the crisis”Desai said valuations at the time were among the most attractive in the region, with the market trading at approximately four times forward earnings. As macro conditions improved, the Fund elevated Sri Lanka to its second-largest country allocation, benefitting from rising equity prices and strategic accumulation.
“For the first time in many years, Sri Lanka has both economic and political stability. The platform is set for stable growth over the next three to four years, as long as this stability holds,” he stressed. The recent natural disaster, he added, is a temporary disruption and unlikely to dent forward-looking market sentiment.
Despite a robust 2.5-year recovery, Sri Lankan equities still trade below their fundamentals and below regional peers.
The broader market’s price-to-earnings ratio sits around 11 times far lower than the 14–16 times seen in 2014–2016, when foreign investors were far more active. Desai noted that company balance sheets have largely normalised, with strong earnings across banking, consumer and industrial sectors.
Illustrating the valuation gap, he compared Commercial Bank of Ceylon, trading near one-time book value, with Vietnam’s Vietcombank, valued at nearly 2.5 times book despite Sri Lankan banks showing stronger earnings momentum. He added that strong consumer-sector firms such as Sunshine Holdings also trade at modest multiples relative to peers in Asia.
Foreign participation at the Colombo Stock Exchange is now just 5–10% of daily turnover — a sharp decline from pre-2018 levels. But Desai emphasised this is part of a global trend, with capital gravitating toward US markets driven by strong S&P 500 and technology-sector gains. With Sri Lanka’s stability and fundamentals improving, he expects foreign inflows to return between 2025 and 2027.
At the same time, he warned that Sri Lanka cannot depend solely on foreign capital. Domestic participation remains shallow, with only 11–12% of unit trust assets invested in equities, far below India and Vietnam.
Desai underscored Sri Lanka’s long-term advantages: strong corporate governance, accessible company disclosures, resilient home-grown corporates, and high-potential sectors such as tourism and logistics. With a market-cap-to-GDP ratio of about 25%, he believes Sri Lanka has “significant room for expansion.”
Calling Sri Lanka one of his “top conviction markets,” Desai said he remains confident for the next two to three years — provided reforms stay on track and the country “does not drop the ball.”
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