Foreign fund says Sri Lanka now one of its top picks

• Cites stability and equities undervalued relative to their fundamentals and regional peers
• Says structural advantages in corporate governance, transparency, pool of well-run companies with strong brands underutilised 
• Warns “from here, it’s up to Sri Lanka not to drop the ball”

AFC Asia Frontier Fund Co-Fund Manager Ruchir Desai - Pic by Ruwan Walpola

AFC Asia Frontier Fund Co-Fund Manager Ruchir Desai on Tuesday delivered an upbeat assessment of Sri Lanka’s capital market outlook, noting that the country is entering one of its most promising phases in a decade, with political stability, macroeconomic recovery, and undervalued equities creating “a strong platform for growth.”

Speaking at the Sri Lanka Economic Summit organised by The Ceylon Chamber of Commerce, Desai said he has tracked Sri Lanka’s market since 2014, alongside other frontier and emerging markets such as Bangladesh, Pakistan, Vietnam, Kazakhstan, and Georgia. 

He noted that while Sri Lanka went through a prolonged period of turbulence between 2018 and 2023, the country now stands out for having regained both political and economic stability; conditions he described as the most critical prerequisites for sustained investor interest.

Desai said he increased the Fund’s allocation to Sri Lanka soon after visiting the country in November 2022, at what he noted as the “bottom” of the crisis. 

“Valuations at that time were among the cheapest in the region, with the market trading at roughly four times forward earnings,” he said, adding that, since then, the AFC Asia Frontier Fund has made Sri Lanka its second-largest country allocation, benefitting from both rising prices and a deliberate increase in exposure due to improving macro fundamentals.

“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, provided this stability holds,” he stressed.

He acknowledged the recent natural disaster as a temporary setback, but insisted markets are forward-looking and Sri Lanka has already faced and recovered from worse shocks in recent years.

Desai argued that despite a strong 2.5-year market recovery, Sri Lankan equities remain undervalued relative to their fundamentals and regional peers.

The broader market trades at around 11 times earnings, below the 14-16 times price-to-earnings ratio seen in 2014-2016, when foreign investor presence was far stronger. 

“Company fundamentals, however, have largely returned to pre-crisis strength. Earnings growth is robust across the banking, consumer, and industrial sectors, return on equity levels have normalised, and private sector banks are benefitting directly from improved credit growth and macro stability,” he pointed out.

He compared Commercial Bank of Ceylon with Vietnam’s largest commercial bank Vietcom Bank to illustrate the valuation gap. “Commercial Bank trades at around one-time book value, while the comparable Vietnamese bank trades at nearly 2.5 times, yet Sri Lankan banks show stronger earnings momentum.”

In consumer markets too, Desai said companies such as Sunshine Holdings demonstrate earnings strength comparable to leading regional consumer giants but still trade at modest multiples.

Although foreign participation in the Colombo Stock Exchange remains sharply lower than a decade ago—now between 5% and 10% of daily turnover compared to nearly 50% in some years before 2018—Desai noted this is part of a global trend, not just a Sri Lankan issue, with investors shifting towards US markets as the S&P 500 and major tech stocks delivered exceptional returns over the past decade.

However, he believes foreign interest could return as macro fundamentals strengthen and stability persists. “If not in 2025, then by 2026 or 2027, you could see foreign funds coming back,” he expressed confidence.

He also emphasised that Sri Lanka cannot rely solely on foreign capital and must deepen domestic investor participation, which remains low. Only 11–12% of unit trust assets under management are in equities, far below levels seen in India or Vietnam.

Desai highlighted several long-term strengths that continue to position Sri Lanka favourably. “Strong corporate governance and transparency, making company access and information far easier than in many frontier markets; resilient pool of well-run companies with strong brands and decades of operational history; and untapped structural sectors, including logistics and tourism, where arrivals of 2.2–2.3 million remain far below regional comparators such as Cambodia,” he explained.

He also pointed out that Sri Lanka’s market-cap-to-GDP ratio of roughly 25% is low relative to countries with more developed capital markets, suggesting significant room for expansion as equity participation deepens.

Desai said Sri Lanka will remain a high-conviction market for the AFC Asia Frontier Fund for the next several years. “It’s one of my top country picks. We’ve been right about Sri Lanka for the past 2.5 years, and I remain very positive for the next two to three years. From here, it’s up to the country not to drop the ball,” he added.

With stability restored, earnings strong, and valuations still attractive, he reiterated that Sri Lanka is well-positioned to deliver continued market outperformance, provided reforms stay on track and confidence remains intact.