Sri Lanka’s capital market is entering its most promising phase in a decade, backed by political stability, an improving macroeconomic outlook, and undervalued equities that present “a strong platform for growth,” according to AFC Asia Frontier Fund Co-Fund Manager Ruchir Desai.
Speaking at the Sri Lanka Economic Summit organised by the Ceylon Chamber of Commerce, Desai said Sri Lanka now stands out among frontier markets for having restored both political and economic stability ytwo conditions he described as essential for sustained investor interest. Having tracked Sri Lanka since 2014 alongside Bangladesh, Pakistan, Vietnam, Kazakhstan and Georgia, he noted that the 2018–2023 turbulence has now decisively given way to recovery.
Desai revealed that the Fund sharply increased its exposure to Sri Lanka after his November 2022 visit, identifying that moment as the “bottom” of the crisis. With the market then trading at just four times forward earnings, the Fund made Sri Lanka its second-largest country allocation, benefitting from both rising prices and improving fundamentals.
“For the first time in many years, Sri Lanka has both economic and political stability. The platform is set for steady growth over the next three to four years, provided this stability holds,” he said. While acknowledging the recent natural disaster as a setback, Desai stressed that markets are forward-looking and Sri Lanka has recovered from worse shocks.
Despite a strong 2.5-year rally, he argued that local equities remain undervalued. The broader market trades at around 11 times earnings, still below the 14–16 times levels seen during the 2014–2016 period when foreign participation was significantly higher. He added that fundamentals have rebounded across banking, consumer, and industrial sectors, with earnings, return on equity and credit growth improving in line with macro recovery.
To illustrate the valuation gap, Desai compared Commercial Bank of Ceylon with Vietnam’s Vietcom Bank: “Commercial Bank trades at nearly one-time book value, versus 2.5 times for its Vietnamese peer, despite stronger earnings momentum here,” he said. Consumer groups such as Sunshine Holdings also show regional-level earnings strength while still trading at modest valuation multiples.
Foreign investor activity remains well below pre-2018 levels now just 5–10% of daily turnover but Desai noted this is part of a global shift as funds chased exceptional returns in the US market. He expects foreign inflows to resume by 2026–2027 if policy stability persists. However, he emphasised that Sri Lanka must deepen domestic participation, as only 11–12% of unit trust assets are invested in equities.
Long-term advantages such as strong corporate governance, transparent disclosures, well-established companies, and underdeveloped sectors like logistics and tourism still position Sri Lanka attractively. With market-cap-to-GDP at just 25%, substantial runway for expansion remains.Calling Sri Lanka a “high-conviction market” for the Fund, Desai said the country is well-placed for continued outperformance provided it maintains reforms and avoids policy slippage
