Sri Lanka’s equity market is entering 2026 on an unusual footing: buoyed less by foreign capital and more by the growing confidence of domestic investors. According to Asia Securities PLC Chairman Dumith Fernando, this shift reflects a combination of interest rate stability, improving financial literacy, and favourable tax treatment factors that are reshaping market dynamics and investor behaviour.
Interest rates remain a central variable. Fernando expects movements of only 50 to 100 basis points, a range unlikely to materially disrupt asset allocation. With yields on fixed income instruments stabilising, equities continue to offer comparatively attractive long-term returns. This relative balance, he argues, reduces the risk of sudden capital flight from stocks to bonds, supporting valuation stability.
What distinguishes the current cycle is the rapid expansion of the local investor base. Data from the Central Depository Systems shows active equity investors increasing to around 98,000 in 2025, up from roughly 60,000 in 2024. New CDS account openings tripled year-on-year to 57,000, with another 5,000 accounts opened in just the first three weeks of 2026. This surge signals a structural rather than speculative shift, driven partly by the absence of capital gains tax and a relatively modest 15% withholding tax.
From a macroeconomic standpoint, deeper domestic participation reduces Sri Lanka’s historic dependence on volatile foreign portfolio flows. In previous cycles, foreign exits amplified market downturns, weakened the currency, and strained monetary policy. A locally anchored market offers greater resilience, helping to stabilise household wealth and corporate financing conditions.
Fernando also cautioned against pessimistic index projections. Lower market targets, he noted, would imply either subdued corporate earnings or sharp valuation compression—scenarios that would require a sudden rise in equity risk premiums. Given improving macro stability and earnings recovery in several sectors, such a shift appears unlikely.
Foreign investors, meanwhile, are no longer treating emerging markets as a single asset class. Global capital is increasingly selective, favouring diversification and liquidity. While Sri Lanka may benefit from this trend, Fernando stressed that foreign inflows are not essential for equities to deliver 20–25% growth, with overseas interest representing potential upside rather than a prerequisite.
However, equity market performance is not isolated from the broader economy. Stronger equity valuations improve firms’ access to capital, encourage private investment, and support job creation particularly in growth sectors such as digital services and telecommunications. In this sense, a domestically driven equity rally may play a stabilising role in Sri Lanka’s post-crisis recovery, provided confidence in macro policy is maintained.
