CSE market PE climbs above 18-year average – FCR

Friday, 21 November 2025 05:46 - - {{hitsCtrl.values.hits}}

Says strong economic performance in 2025 pushed valuations higher, supported by lower lending rates, faster construction growth and improved industrial output
YTD, ASPI up 45%, S&P SL20 up 31.3%, and market cap up 45.3% to nearly Rs. 8.28 t
Corporate earnings rose an estimated 25% in 2025, according to FCR
Economic growth is expected to moderate in 2026 as weaker rupee raises import costs and consumption slows
GDP growth projected to ease to 3–4% in 2026 from around 5% in 2025
Earnings growth expected to normalise to about 17% in 2026, though construction, tourism and diversified exporters remain well positioned

The Colombo stock market has reached a major valuation milestone in November 2025, trading at a price-earnings (PE) level significantly above its long-term norms, First Capital Research (FCR) said yesterday.

According to FCR, the ASPI is now valued at a premium to its 18-year historical PER average of 12.0x based on 2025 earnings, marking a rare period in which market valuations have exceeded their typical range.

As at yesterday, the ASPI has gained nearly 45% year-to-date (YTD), with the active S&P SL20 gaining 31.3%. Market capitalisation was up 45.3% to nearly Rs. 8.28 trillion.

FCR attributes the record levels to the strong performance of the broader economy throughout 2025.

Business activity strengthened across sectors as lower and stable lending rates supported construction, which recorded its fastest expansion since 2021.

Industrial output and confidence improved to multi-year highs, pointing to robust domestic demand and stronger corporate earnings. Export-focused industries and tourism benefitted from increased external demand and a weaker currency, with tourist arrivals rising above pre-2018 levels.

Macroeconomic conditions also played a central role in pushing valuations higher. Low inflation, consistent engagement with the International Monetary Fund (IMF), and improved political stability following decisive election results strengthened business sentiment and supported the sustained market rally.

These conditions provided a favourable backdrop for earnings growth, which FCR estimates rose by about 25% in 2025.

However, the research firm notes that several emerging pressures point to a moderation in the growth environment in 2026.

The depreciation of the rupee is expected to raise import costs and constrain household consumption.

Government capital expenditure continues to fall below allocated levels, reducing its potential stimulus to the economy.

Weaker Small and Medium Enterprise (SME) activity and slower private sector investment add to the softer outlook, with GDP growth projected to ease to 3-4% in 2026 compared with an estimated 5% in 2025.

Corporate earnings are also expected to normalise, with FCR forecasting growth of around 17% in 2026. Despite the slower pace, select sectors, particularly construction, tourism, and diversified export businesses, remain positioned to benefit from ongoing policy measures and currency dynamics.

With the ASPI now trading above its fair-value range for 2026 and at valuation levels rarely observed over nearly two decades, the market’s record PE multiple reflects both the strong economic rebound in 2025 and the evolving macroeconomic environment heading into 2026.