Sri Lanka enters 2026 with an unusual mix of vulnerability and resilience: a small, open economy still rebuilding credibility after multiple shocks, yet now operating with clearer fiscal, monetary and external buffers. Cyclone Ditwah is the first serious test of that new macro framework. The immediate impact is visible — damage to infrastructure, short-lived disruption to agriculture and tourism, and a temporary squeeze on prices — but the key investor question is whether the cyclone alters the trajectory or mainly reshuffles timing and sector leadership.
In this conversation, Bimanee Meepagala, Chief Executive at CT Smith Asset Management, argues the setback should be 2026 transient, with growth softer in late 2025 and early 2026 before reverting to trend. Her revised view trims GDP by roughly 0.5% for 2026, conditional on the speed and efficiency of reconstruction.
Trisha Peries, Head of Research at CAL, broadly agrees on direction but stresses composition: the CapEx envelope may be redirected and front-loaded towards rebuilding, while imports rotate from discretionary consumption towards construction inputs — more a timing change than a structural downgrade.
Asanka Herath, CEO, Unit Trusts and Head of Equities at Lynear Wealth Management, takes the bullish edge, suggesting reconstruction can lift aggregate activity and earnings, creating a “government works” year. For investors, the implication is a 2026 market defined less by broad beta and more by dispersion — where selecting the right sectors and stocks matters.
As a fund manager, how has the potential fallout of the cyclone led you to adjust your expectations for Sri Lanka’s economy in 2026?
Bimanee Meepagala: Let me start by addressing the question, looking at the more recent natural disasters we have experienced, like the 2004 tsunami and the 2016 floods, and, of course, the COVID- 19 pandemic and other events. What we have consistently observed is that the economy experiences a temporary setback, but then returns to its previous growth trajectory.
Given the fiscal, monetary, and external buffers we currently have, this is probably one of the better periods in terms of preparedness to face an external shock of this nature. Because of this, we believe the recovery will be faster and perhaps even smoother. If you look at the growth forecast, we expect the fourth quarter of 2025, and possibly the first few months of the following year, to be slightly sluggish.
However, over the next few quarters, we anticipate a strong rebound. Compared with our previous growth forecast, we now expect a reduction in GDP of around 0.5–1%. The impact on growth will also be milder if reconstruction work progresses quickly and is delivered efficiently.
Bimanee Meepagala, Director and Chief Executive at CT Smith Asset Management
“Overall, we feel inflation is under control.”
Do you anticipate a change in inflation expectations?
Bimanee: If you look at inflation, it is higher compared with the pre-Ditwah prices we saw, particularly in the vegetable sector. What is interesting, however, is how it has eased on a week-on-week basis. In some categories, prices have fallen by around 50%, and on average, I would say they are about 20–30% lower than the peak Ditwah prices.
There may still be milder increases, but overall, we feel inflation is under control.
In terms of interest rates, we are seeing some adjustments, particularly on the corporate side, where banks and finance companies have raised fixed deposit rates. The AWPLR has moved slightly higher, but we believe this is largely due to liquidity issues, with around Rs100 billion being unevenly distributed in the market. We expect this to be temporary and that interest rates should normalise over time.
On the government securities side, rates have eased, especially at the long end, while short-term Treasury Bill rates have remained stable. The markets are reacting accordingly.
Trisha Peries: In terms of economic growth, I would agree with Bimanee. Our initial expectation for GDP growth has probably been reduced by about 0.5%, so perhaps somewhere around 4% in 2026. We remain quite positive about the economy overall.
On the fiscal side, the government had initially allocated around Rs1.4 trillion for CapEx spending. The difference now is that this is being redirected towards reconstruction efforts rather than new building projects. As a result, there could be a timing change. Where CapEx spending might previously have occurred more towards the second half of the year, following tender approvals, we now expect it to happen a little earlier in the year.
Whether this will offset the initial dip in GDP caused by the cyclone and potentially increase our GDP expectation remains to be seen, depending on how quickly the government acts. Similar timing differences appear on the external accounts. We had seen strong momentum in consumer imports, but now there may be a slight reduction in discretionary spending. On the other hand, imports of construction
materials are likely to pick up earlier in the year.
In terms of interest rates, we still expect a reduction of about 25 basis points, potentially in 2026. Inflation has increased by perhaps 50 basis points at most, mainly due to the start-of-year impact, and we are not expecting it to reach or exceed 5%.
On the external front, the outlook could be slightly more positive, with the RFI from the IMF of $200 million, in addition to the previously expected IMF tranche, as well as slightly higher remittances. There is a clear balancing effect, but we are not seeing a major change in our forecast or outlook for 2026 as a result of the cyclone.
Asanka Herath: Our view is that, at an aggregate level, this will lead to a pickup in economic activity and disposable income during 2026. As a result, we have marginally upgraded our GDP forecast for the year.
We had previously expected growth of around 4–4.1%; we now anticipate it could be closer to 4.4–4.5%. Given the fiscal buffers Bimanee mentioned, we are fairly confident that interest rates will remain range-bound at current levels, possibly moving up by around 20 basis points over the course of the year. The currency is also expected to remain fairly stable, with a maximum depreciation of roughly 2–3% in 2026 from current levels.
The cyclone was clearly unfortunate for Sri Lankans. From an investor perspective, however, we are relatively positive on the outlook for the year, as corporate profitability may be higher while rates remain range-bound.
What exactly leads you to suggest that economic growth will be higher than forecast?
Asanka: Next year is going to be what you might call the “government works” year. When assets are destroyed, it is not recorded as a negative in GDP. Assuming we have lost a decade’s worth of infra- structure, that does not directly impact GDP or recurrent income, except to the extent that it disrupts economic activity.
Assets need to be rebuilt, and reconstruction generates both direct and indirect activity. Take a road and a bridge in the Central Hills, for example. Government funds are transferred directly to contractors, who then purchase mate- rials such as sand and cement.
The effect extends further. The work- ers, many from the blue-collar sector, will receive wages, increasing disposable income. They will spend that income on a range of goods, from sweets to chocolates to other items. This leads to a pickup in consumer spending.
Disruptions to tourism and agriculture, as we all agree, are likely to last only three to four months. The remainder of the year will focus on reconstruction.
Does Ditwah put pressure on the government’s ability to stick to budget targets?
Bimanee: Just after the elections, one of the bigger concerns for investors was political stability and whether we would remain in the IMF programme. It is now quite clear that we are committed to the programme, and in fact, we have essentially outperformed the targets. We expect to continue on this trajectory, and given the magnitude of Ditwah’s impact on the economy, there may even be scope to renegotiate some of the headline numbers.
As Trisha mentioned, we believe that the public investment budget of around Rs1.4 trillion will be redirected towards rebuilding and reconstruction, which roughly amounts to about $4 billion. We do not anticipate any major issues in terms of fiscal slippage or a drop in revenue collections, and broadly, we expect the budget to remain on track.
Asanka: To add to Bimanee’s point, the government now has a CapEx allocation of around Rs1.2–1.3 trillion for 2026. Historically, this has been about Rs1 trillion, maybe slightly more, and we rarely spend the full amount. There has usually been an annual buffer of around Rs400–500 billion that goes unspent. This buffer is typically unused due to administrative bottlenecks and is not unique to this government.
Crises like this build focus, meaning that some typically unspent funds may actually be utilised. To that extent, I do not think there will be a formal reallocation of government funds, because the government already has the resources for its planned projects. However, because administrative focus shifts, some reallocation may occur.
How much more money will be allocated to reconstruction?
Asanka: We expect an additional maximum of around Rs500 billion this year. I am not suggesting that the first Rs1 trillion will be spent in a timely manner, but it does provide the government with the headroom to spend.
Reconstruction will likely take two to three years, but the key point is that the government has the capacity to undertake this work without causing fiscal slippage, both in rupee and dollar terms.
Trisha: I think one issue is that the President referred to it as a supplementary estimate, which implies it is additional. However, the constraint we have is that primary expenditure must remain within 13% of GDP. As Asanka also mentioned, the impact will likely be spread over a sufficient period so that it does not affect the fiscal targets for one year.
Is it not feasible for Sri Lanka to explain the situation to the IMF and adjust the targets it has set?
Asanka: I think the government will consider that, which is probably why the IMF team will visit in January to discuss the fifth tranche. Some believe the government has asked the IMF to review the programme and see whether it is possible to renegotiate the terms, including the size of the facility. It is plausible that the IMF will approach this in a constructive and understanding manner.
At present, we have not only adhered to the IMF programme, but we have also outperformed on almost all macroeconomic indicators. I am optimistic that Sri Lanka will follow through. For example, we had previously expected a primary surplus of around Rs900 billion for 2026. As I mentioned, this event could add an additional Rs400–500 billion. There is room within the budget; it is just a question of which line items would change.
Given the potential impact on equities and fixed income, how have your expectations for fixed income shifted since the cyclone?
Bimanee: We believe that interest rates will remain fairly stable. Asanka also mentioned that the government had around Rs1.2 trillion in cash surpluses as of August, which have been managed effectively, with repayments exceeding the amounts due at maturity. This strong cash position and responsible debt management help support stability in interest rates.
Inflation may exert some pressure, but we are still achieving positive real returns. This leaves space to cut rates if necessary to spur faster growth, and we would not rule out a possible rate reduction in the first quarter.
Globally, particularly with the US easing cycle underway, there is debate about further rate cuts. So far, we have seen some flows into the local government securities market, which currently stands at about Rs142 billion, up from around Rs66 billion at the start of the year.
This low interest rate environment is likely to continue. In the corporate debt market, we have observed spikes in fixed deposit and debenture rates, but we view this as transitional. Timing issues with multilateral and bilateral funds, originally expected in the fourth quarter, are now likely to arrive in the first quarter of 2026. This includes around $700–800 million due, the $200 million RFI, other aid, and higher worker remittances as families provide support.
What effect do you anticipate the cyclone will have on listed companies?
Trisha: Sectors that will outperform or underperform are likely to be different now. Take construction, which has become particularly interesting due to the reconstruction efforts. There was already a natural buildup, with lower interest rates and credit growth, and we had been seeing construction companies beginning to turn around over the past 12 months. This process could now be accelerated. The government’s CapEx efforts, which we expected to spill over into 2026, should result in better earnings for construction companies, and now that timeline could be expedited.
Trisha Peries, CFA, Head of Research at CAL
“People are likely to re-evaluate their spending priorities, and we may see an upturn in the second half of the year.”
The mix of activity, however, will be slightly different. Previously, growth in the construction sector was largely driven by retail-related spending. Now, it will be more focused on large-scale reconstruction efforts.
Lower interest rates will still support retail spending, so momentum in consumer discretionary areas is likely to continue, though there may be a temporary setback. While growth in consumer spending remains, the upside may be slightly dampened compared with before, which may differ somewhat from Asanka’s view. People are likely to re-evaluate their spending priorities, and we may see an upturn in the second half of the year.
What do you think will happen for those companies in 2026 in terms of earnings?
Trisha: With regard to the overall universe of listed stocks, we broadly expect the market to grow by around 15% in 2026. In 2025, growth was slightly lower due to one-off losses incurred by some companies. Excluding those, performance has been stronger.
For example, banks contribute significantly to earnings and earnings growth. Next year, however, we are not expecting stellar performance from the banking sector. We have already seen some contraction in key names, and many impairment reversals have been undertaken, with a little remaining.
On the other hand, the Central Bank is pushing for some moderation in banking activity, which could slow lending momentum. So far this year, the banking sector has seen over 25% growth in lending, with around 20% of that going to NBFIs. NBFIs could be more affected by Cyclone Ditwah, particularly in terms of repayment capacity, as they have fewer buffers.
As a result, we may see a temporary reduction in loan growth momentum going into next year. This could taper off and pick up again from the second quarter, but there is some uncertainty regarding the banking sector’s lending potential.
Are these numbers different to what you expected before the cyclone?
Trisha: I think we were expecting banking sector earnings to be slightly higher. As I mentioned, we had expected loan growth to maintain its momentum, and that finance companies would continue performing strongly. Certain allocations have been made to support this.
However, there is a slight dampener on overall corporate earnings. For context, I believe 2025’s earnings were up around 10% up to September, including the ones that had one-off losses like LOLC and Browns Group.
Bimanee: If you exclude the exceptional earnings from last year, earnings are actually up substantially, by over 50% year-on-year. On a cumulative year-on-year basis, the increase is around 18%.
Given these numbers, I agree with Trisha that we expect earnings growth of about 15% in 2026. There is clear earnings momentum. Supporting this, standalone corporate tax collections, including both listed and unlisted companies, have increased by over 60%, indicating that growth is largely driven by the private sector. Previously, growth was more government-driven, but this time private sector activity is the key contributor. Consumer-based taxes are also up by about 44–45%, further reflecting underlying economic strength.
While there may be some dampening effects, it is important to remember that the second phase of public wage increases is due from January, which will be positive for consumers. Private sector wage hikes generally occur in April, and real wages have been rising. All of these factors are likely to support consumer spending by the second quarter of next year.
If this approach could lead to higher economic growth in 2026 than previously expected, how might it affect corporate earnings and listed companies?
Asanka: Given the impact of the cyclone, some sectors may be adversely affected. Currently, we consider only around 70 listed companies, based on how investable they are, their market liquidity, and other factors, and we have active coverage for about 50–54 of these companies.
Going into next year, we were expecting annual earnings growth of around 20% across these 50–54 companies. This is a diverse basket, including consumer, construction, and construction materials companies.
Because of Cyclone Ditwah, I would expect earnings for construction and construction materials companies to see a 10–15% uplift. Certain consumer companies may also see earnings improvements, likely starting from February–March onwards, driven by a general pickup in consumer disposable income.
Compared to last year, do you think it’s more challenging for investors to pick winners, and what new factors or volatility should they now consider?
Asanka: The dispersion of returns will be significant next year. Some companies will see earnings moderation, while others will see earnings growth.
What I usually say is that, when doing allocations, investors should focus on which sectors of the economy are gaining momentum. From late last year, we increased our allocations to construction and construction materials, and reduced allocations to consumer discretionary sectors and banks.
When an economy bottoms out like it did in 2022, consumer defensive sectors perform well. At the same time, much of the risk is already priced into financial services, so it made sense to have higher allocations to consumer defensives and banks at that point.
As the economy recovers, those sectors tend to deliver substantial returns. After that, the economy moves into a phase where consumer discretionary sectors begin to perform. Within the consumer discretionary basket, construction and construction materials, outside of government and private sector projects, fall into higher-ticket discretionary spending. These tend to be among the last sectors to perform well. That is why we expected this year, as the economy reached a certain level of stability, for those sectors to start doing better.
My advice is that investors should consider the normal path a recovering economy tends to follow. Given the impact of Ditwah, investors should focus on the activities it is likely to generate, rather than on short-term headlines. The news tends to highlight only temporary factors.
If you look at inflation cycles, for example, the paddy crop cycle is around three and a half months, vegetables are about two months, and poultry depends on the production cycle. Investors should look beyond these temporary effects and focus on the underlying economic activity that is driving the pickup.
Given the current scenario, have you changed your asset allocation between fixed income and equities, or are your equity exposures still at post-Ditwah levels?
Asanka: I do not see allocations changing because of Ditwah. Even when the market came down, we doubled down on our convictions. There is a reason why we continue to remain bullish on risk assets rather than fixed income, and that has much more to do than just the cyclone.
Asanka Herath, CEO, Unit Trusts and Head of Equities at Lynear Wealth Management
“Next year is going to be what you might call the “government works” year.”
If you look at Sri Lanka’s interest rate regime since 1970, interest rates have not remained at these levels for more than one to one and a half years. In fact, for much of the past 50 years, even the most senior decision makers in the country would not have experienced a cycle like this. Historically, the pattern has been to remain invested in risk assets such as real estate and equities, exit them at the right time, and then move into fixed income to benefit from peak interest rates for several years.
Most of us are in agreement that interest rates are likely to remain low, or at least range-bound, for another two years or so. That would imply a period of nearly four years during which rates have stayed at relatively moderate levels. In that environment, both institutional and individual investors will be compelled to increase exposure to riskier assets. By riskier assets, I do not mean only listed equities, but also private businesses and real estate.
This shift in asset allocation at the aggregate level will have significant implications for overall asset pricing in the country. That is why I continue to believe that, despite the cyclone, risk assets, including listed equities, are likely to generate higher returns.
In 2023, when we looked at the next two years of earnings growth across the 50–54 stocks we track, the annualised earnings growth rate was around 30–40%. That rapid pace of growth is expected to ease, but this is not a negative outcome. Rather, it signals that the economy is approaching a more stable phase.
Would you agree that Sri Lanka’s equity market has re-rated higher, and does this show up in earnings growth or the price-to-earnings ratio?
Trisha: At the start of 2025, the market PER on a trailing 12-month basis was around 8x. Now it’s closer to 11x or 12x, indicating a clear re-rating.
If valuations remain at these levels and earnings grow by around 15%, with the PER holding at about 11x, that would translate into roughly 15% growth in the ASPI, assuming everything else remains constant. This is not the kind of outsized return we saw over the past couple of years, and it is also unlikely to be market-wide.
As discussed, we are likely to see certain companies and sectors perform very well, while others underperform. There will be a shift in how investors need to approach the market. Previously, particularly before the last six months, investing in a broad range of stocks could still deliver reasonable returns. Going into 2026, that is likely to be more challenging.
Investors will need to be more selective, focusing on where earnings growth is expected to come from and whether the companies they invest in can outperform market earnings. They will also need to consider whether they are targetting long-term value or short-term returns. In addition, increased M&A activity could play a role in supporting share prices. These are all factors to watch in 2026.
Asanka: The market does have the potential to re-rate further, but I have always believed that you don’t invest in the market indiscriminately. Given the state of the market going forward, you will need to be more selective about the equities you add to your portfolio.
As I mentioned earlier, Sri Lanka has historically had a much higher allocation to fixed income than it should have. Even starting from the end of the war, when interest rates were at current levels or lower, the market PER was around 20% higher than it is today. This excludes the extraordinary PEs we saw during 2009, 2010, and 2011.
Even excluding those peaks, I would say there is roughly 20–50% potential for re-rating. With earnings growth of around 20% and a re rating of, say, 20–50%, certain select counters or a carefully constructed portfolio could generate returns in the range of 30–40%.
Has the re-rating already happened in construction, and is it now moving into the consumer sector?
Asanka: I expect the re-rating to happen across the board for fundamentally sound companies, with sharper re-rating for companies showing strong earnings growth, such as in construction. For example, larger banks have the potential to trade at higher multiples than they currently do.
This re-rating is likely to be driven by the fact that Sri Lankan investors are largely confined to domestic opportunities. When fixed income rates remain low, there are limited options for higher returns, which will naturally lead to a higher allocation to equities. Investors will be willing to accept relatively lower equity returns than they would have two years ago, resulting in a repricing of the market.
What are your views on the market re-rating, and which sectors do you think are most likely to attract higher multiples?
Bimanee: Some amount of re-rating is warranted. Unlike in previous periods, from around 2022, we have seen back- to-back positive returns for three years in a row. This corresponds with positive outcomes in primary balances and current account balances, and equity markets have performed well while interest rates have steadily declined.
In that context, despite the short-term impact of recent events, we feel a market re-rating from the current 11x to 12x PER to around 13x to 14x is justified. Earnings are expected to moderate to about 15% growth, which also supports potential upward movement in the market. In other words, the re-rating is driven by strong underlying fundamentals in the economy, alongside earnings momentum.
In terms of sectors, it is unlikely to be a broad-based rally. Certain sectors will perform better than others. Construction, as mentioned, is particularly well positioned.
Looking at catch-up growth, if we go back to 2018, there were significant government-sponsored projects at the time. On a peak-to-peak basis, GDP is still down around 40% compared to the 2018 peak. Other sectors have already seen substantial catch-up growth, but construction has lagged, meaning the potential for rapid growth and re-rating is significant. Most construction companies also have ample capacity to deliver, which makes this sector particularly attractive.
For banks, historical market multiples were high, around 1.3 to 1.4 times price-to-book, whereas now they are close to one time. Credit-to GDP ratios at their peak were about 40%; currently, they are around 28%. This indicates room for additional lending. Considering total infrastructure damage, roughly 80% is government-led and 20% private sector. That implies lending opportunities, and we expect banks to sustain lending growth of around 15–17%.
ROEs are currently strong, at around 17% plus, and given capital buffers and liquidity positions, banks are well placed to sustain this momentum.
Asanka: Looking at historic multiples, the three large banks, especially the two largest, have the potential to re-rate by 20–30%.
This is supported by the possibility of credit growth. In addition, central bank directives provide formal relief, relaxing the recognition of non-performing loans (NPLs). As long as the economy and businesses recover, bank balance sheets are unlikely to bear the full impact of the cyclone.
Immediately, any impact will be reflected in the books, but it will only become a real issue if the economy does not recover.
This situation is very different from previous shocks, such as the Easter attacks. Back then, the government had to provide relief to affected borrowers, and when COVID hit a year later, many of those NPLs remained unresolved for an extended period.
In this case, the cyclone is expected to be a one-off event. As the economy recovers, most of these borrowers should be able to resume servicing their debt, limiting the long-term impact on bank balance sheets.
With low interest rates likely to continue, how should a portfolio manager position for assets that can outperform, since fixed income is less attractive?
Asanka: A portfolio manager has to consider multiple factors, primarily driven by the objectives of the portfolio. These objectives could include steady returns over a longer period, periodic liquidity, and so on. For most portfolios, there will always be a fixed income allocation.
To reframe the question, what should a portfolio manager do now given that interest rates are expected to remain low for an extended period? The answer is that portfolios will need a higher allocation to assets with greater risk.
This higher allocation must be decided prudently. When referring to higher-risk assets, this is not limited to listed equities. Real estate prices, for example, can continue to appreciate steadily if the economy stays on its current trajectory.
Similarly, private businesses can generate attractive returns over time, making private equity an option. For clients who own private businesses, this is an opportune time to invest for growth. This also explains the pickup in M&A activity because investors with capital are deploying money into business opportunities.
In essence, the strategy involves higher allocations to listed equities, private equity, private businesses, and real estate.
Given the extended period of low interest rates, what’s your view on leverage in equities, and how might long-term low rates impact the market?
Trisha: I would say it is probably a good time to use leverage. It has picked up over the last year, but it is still nowhere near the peaks we have seen historically. It also does not appear to be concentrated in specific stocks that could significantly impact the index, which was a concern in the past.
That said, it is an opportune time to consider leverage, but caution is essential. Investors need to be very selective about where they deploy capital. Being on the wrong side of the cycle or in the wrong stock can lead to significant losses.
If positioned correctly, leverage can work in your favour. Sectors like construction require careful consideration, and timing is key.
I would expect leverage to increase as we move into 2026, though we do not have official market-wide figures. Currently, it is not at a concerning level, as the Governor has also indicated.
Do you deploy leverage in the market for any of the portfolios that you’re managing?
Bimanee: At this point, no. Under the current mandates, we do not use leverage. It is something we could consider, but as of now, the mandates do not allow it.
“The impact on growth will also be milder if reconstruction work progresses quickly and is delivered efficiently.”
– Bimanee Meepagala, Director and Chief Executive at CT Smith Asset Management
Asanka: Correct. The mandates do not permit direct borrowing, so we cannot use leverage within the mandates.
However, we work closely with clients and are aware that some are using leverage to fund the mandates assigned to us.
On the original question of what portfolio managers can do differently, going back to the conversation Bimanee and I had on commercial papers, if the economy grows steadily and remains stable, corporate debt can once again become an attractive option. Rated corporate debt, in particular, offers a way for investors to earn slightly higher returns than traditional fixed income instruments without taking excessive risk.
Construction stocks have risen considerably in recent weeks. Has what you anticipate already been priced in?
Trisha: I think there’s a lot more to go. Even if you look at the construction counters, some of the bigger names are probably still trading below 11x earnings. I don’t believe earnings are reflective yet, so there is likely space to readjust going forward.
Asanka: I agree. To start with, I should disclose that we hold fairly large positions.
That said, several segments of the construction materials industry have been operating with significant overcapacity for the past two to three years and remain underutilised. This suggests there is considerable room for volume growth across multiple subsectors of the industry.
Bimanee: People were used to 6–8x PE, so 11x seems expensive. That’s why when earnings come in and there is confidence in a market re-rating, these multiples are likely to adjust.
There is significant overcapacity built up over the years, and catch-up growth in the construction sector has not yet kicked in. There is much more potential for an earnings re-rating.
With Sri Lanka considering liberalising imports, could reduced protection for construction materials dampen the sector’s outlook? Is this being factored in?
Asanka: The discussion around removing paratariffs goes back at least 12–13 years and hasn’t progressed. One key reason is the perceived need to protect domestic producers and the manufacturing sector.
Whether a government moves forward with removal largely depends on its overall policy direction.
There has been some debate about whether the IMF programme could push for paratariff removal. From my understanding, as long as fiscal and external prudence targets are being met, the IMF is unlikely to interfere with specific government policies.
It depends on the direction the government chooses to take.
Are there still bellwether stocks or industries in Sri Lanka that indicate the broader market or economic trends?
Asanka: Banks remain a bellwether for the market. However, a slowdown in a bellwether company’s growth does not necessarily indicate a negative for the broader economy.
Additionally, companies with widespread distribution and a focus on general trade can also serve as strong bellwether indicators.
Trisha: Currently, banks are the key bellwether, and they continue to be highly investable.
Our initial expectation for GDP growth has probably been reduced by about 0.5%, so perhaps somewhere around 4% in 2026. We remain quite positive about the economy overall.”
– Trisha Peries, CFA, Head of Research at CAL
Foreign investors looking at Sri Lanka typically focus on names like John Keells, the banks, and possibly larger companies such as Hemas and Sunshine.
Other conglomerates, like Hayleys, are fairly representative of the broader market, though not always seen as strict bellwethers, and may be relatively undervalued at the moment.
Aitken Spence could also be considered, although it has higher exposure to tourism.
Overall, Hayleys and John Keells are probably the closest representatives of the market as bellwether stocks.
How do you expect consumer stocks to rebound as spending picks up in mid-to-late 2026, and do these companies have enough unused capacity to meet that demand?
Bimanee: I think that, at the moment, capacity is not the issue. If you look at overall GDP, capacity utilisation based on 2024 numbers was around 64%.
Our channel checks suggest that this has improved to about 70 to 75%, which means there is still ample capacity that can be pushed through before the next capex cycle really comes in.
At this point in time, capacity is not the problem. On the consumer side, we are quite positive. There may be initial setbacks, but broadly, with wage hikes and normal economic growth picking up, we feel that the consumer will be fairly strong.
Similarly, if you look at the telecom industry in comparison with regional peers, data usage is around 40 GB, while regional peers are closer to 200 GB. That indicates significant potential in the space.
As usage ramps up, there is also more pricing pressure because the market has effectively become a three-player industry, alongside the rollout of 5G. These are all positives for the sector.
Insurance is another sector to consider. Penetration levels are very low, at under 1%.
A key positive for next year is the introduction of IFRS 17, which is an accounting standard that will come into effect. Historically, insurance valuations have been quite complex, but this accounting treatment will bring greater transparency to the numbers, allowing investors to better forecast profitability.
The introduction of concepts such as the contractual service margin will also provide clearer indicators of how the market can assess the insurance sector.
Turning to the export sector, we are expecting a marginal depreciation of the currency due to upcoming foreign debt servicing payments.
With this mild depreciation, and with US tariff-related issues largely behind us, we feel that the market has settled, especially with tariff cuts coming through. Demand in the US should also normalise.
An additional positive is that India and the US have progressed to a more advanced stage of trade deal negotiations.
Sri Lankan apparel manufacturers have significant capacity in India, which could be supportive. This is a sector that has been somewhat overlooked due to uncertainty created by tariff spikes.
However, it could be attractive for medium to long-term investors, as few have taken positions because of that uncertainty.
What key factors will attract foreign investors to Sri Lanka, and how could increased foreign inflows influence asset prices and long-term equity investment?
Trisha: When it comes to foreign investment, we have been expecting a large inflow for some time, but it has not materialised. Our macroeconomic environment has been positive, and we have entered a period of stability, yet substantial foreign investment is still limited.
This is not unique to Sri Lanka; it reflects a broader global trend of investors moving away from frontier markets. Even in Pakistan, foreign investment is slowing.
Globally, interest rates are coming down, which could eventually change the situation.
In our conversations with investors, interest remains limited. The focus is mainly on banks and, to a lesser extent, consumer companies.
Material commitments are sparse, and arranging meetings is difficult. Many of the funds that were active ten years ago no longer cover Sri Lanka or frontier markets, making this more of a systemic issue than a country-specific one.
Foreign investors tend to focus on banking stocks because they allow larger volumes of investment, rather than necessarily being the best performers.
Occasionally, companies such as Hayleys or Sunshine are also considered.
Hemas is particularly interesting for long-term investors, as it is expanding, which may compress ROEs in the short term but offers potential over time.
Similarly, Sunshine and similar consumer-oriented companies could also be attractive.
Bimanee: I feel the same way. Globally, FDI flows have essentially halved from their peak levels. This is not a Sri Lanka-specific issue; it reflects a broader trend of foreign investors avoiding emerging and frontier markets.
That said, given Sri Lanka’s macroeconomic strength and the recent decline in US interest rates, foreign investors have reason to take another look.
Vietnam’s inclusion in the emerging market index may also free up space for Sri Lanka.
Another factor is the potential for a future rating upgrade. If that happens, it would be a significant positive, especially as we are just starting to rebuild our track record.
Realistically, it may take another year or two before substantial foreign inflows materialise.
Could Sri Lanka’s lower valuations, compared with higher P/E multiples in Southeast Asia and India, make its market more attractive for investors and prompt a potential shift of funds?
Asanka: I think Sri Lanka is attractive today, but the country has not been investable for a sizeable foreign investor since early 2019.
“Disruptions to tourism and agriculture, as we all agree, are likely to last only three to four months. The remainder of the year will focus on reconstruction.”
– Asanka Herath, CEO, Unit Trusts and Head of Equities at Lynear Wealth Management
We had the Easter attacks, which were an early warning of a potential sovereign crisis, then COVID, followed by the economic crisis. That is a six-year period of disruption.
The global frontier and emerging market fund management landscape has also changed significantly. As Trisha mentioned, many of the funds that used to invest in Sri Lanka no longer exist.
Even where funds remain, the fund managers themselves may not have any experience with Sri Lanka, as personnel have changed.
Sri Lanka therefore needs to go through a process of being uncovered again and rebuilding investor confidence.
On the positive side, our macroeconomic situation has never been more favourable than it is now, and it is likely to remain so over the next two years.
I do expect foreign flows to return as confidence improves. However, so far, inflows have been underwhelming and may not match the levels we would ideally want.
The key point is that, with interest rates remaining at current levels, the domestic fund pool is sufficiently large to unlock value in risky asset classes.
Bimanee: On the fixed income side, we are beginning to see some inflows. I think it is a matter of staying on track, continuing our pitches, and maintaining engagement.
“This low interest rate environment is likely to continue. In the corporate debt market, we have observed spikes in fixed deposit and debenture rates, but we view this as transitional.”
– Bimanee Meepagala, Director and Chief Executive at CT Smith Asset Management
Confidence in fixed income is gradually being rebuilt.
Equity inflows may take a little longer, but I am confident they will follow.
Coming to the end of this conversation, how do you feel? What are your conclusions?
Trisha: 2025 was still a strong year for equities, but 2026 is likely to be more challenging, as we have been discussing.
Success will depend on picking the right winners, both in terms of sectors and specific stocks.
One piece of advice I would offer is not to follow the herd. As we have noted, more money is likely to enter the market, partly because there are few alternative attractive asset classes.
“At present, we have not only adhered to the IMF programme, but we have also outperformed on almost all macroeconomic indicators. I am optimistic that Sri Lanka will follow through.”
– Asanka Herath, CEO, Unit Trusts and Head of Equities at Lynear Wealth Management
A large pool of funds may flow in, but it is important, particularly for retail investors, not to get swept up in market trends.
Be cautious with the stocks you choose. Just because a stock has delivered a 50% return does not mean it will continue to perform well.
Focus on the fundamentals: consider earnings potential and whether the company can beat market expectations.
Bimanee: With 2026 in mind, Ditwah represents a temporary setback. I think the market will recognise this once conditions settle.
Interest rates are likely to remain quite stable.
This stability should support the equity thesis we have been discussing. Current macro fundamentals are strong, and if this trajectory continues, we can expect positive returns to persist.
While they may not match the exceptional levels seen in recent years, equities should still outperform fixed income, likely delivering around twice the returns.
Asanka: I think 2024 was probably the easiest year to generate positive equity returns from point to point.
I expected 2025 to be more challenging, as certain sectors were likely to outperform others, making sector selection important.
Going into 2026, this will be even more the case. Positive returns are still possible, but achieving strong gains will require diligence and careful stock selection.
In terms of the broader picture, the cyclone has only temporarily knocked Sri Lanka off its trajectory.
We are possibly in the middle of one of the most stable periods of economic growth and interest rates that Sri Lanka has experienced over the last three to four decades.
This stability is supported by the IMF programme, the Central Bank Act, and other legislation, which are expected to enable Sri Lanka to run a primary surplus and a current account surplus over the next two to three years.