Success in equity investing depends less on finding the perfect moment to buy or sell than on understanding the fundamentals, diversifying risk, and having the patience to stay invested. While fixed-income instruments offer stability, equities, over time, have tended to deliver superior returns. But in markets like Sri Lanka’s—where sentiment often trumps fundamentals—investors face additional challenges in playing the long game.
“Whether you are a seasoned investor or just entering the market, studying the market is critical,” says Nusrath Mohideen, Head of Research at Bartleet Religare Securities (BRS). “While it’s important to review research reports and seek advice from your investment adviser on market sentiment and direction, it’s equally crucial to do your homework. Staying informed about developments in the corporate world and the stocks you’re investing in will help you make better decisions and benefit in the long term.”
Retail investors, in particular, tend to enter the market during euphoric upswings and exit during corrections—often at a loss. One example is the post-election rally 2024, when the ASPI surged by 5,000 points before retreating by 2,000 to 3,000. Investors who bought at the peak without understanding the market’s drivers were exposed.
In Sri Lanka, political developments have a notable impact on market performance. Therefore, investors should keep a close eye on developments, remain calm, and seek out opportunities within the market. There’s always potential if you look closely.
Stability—or anticipation—can drive rallies, as can expectations of fiscal or monetary shifts.
Interest rates also shape investor behaviour. With fixed-income returns having dropped significantly, equities have gained attention. “When rates are low, fixed-income becomes less attractive, and equities look better. But that also depends on your risk appetite,” she adds.
Speaking of opportunities, higher corporate taxes can impact bottomline growth. During these times, it’s important to stay invested in fundamentally sound stocks that have the potential to provide higher returns. ‘Sin stocks’ are subject to heavy taxation but often offer strong dividend yields. As Mohideen explains, investors must consider the whole picture: earnings potential, dividends, and the company’s fundamentals.
During market downturns, fundamentals matter most. Companies with sound balance sheets, sustainable cash flows and prudent management tend to weather volatility better. “In the short term, sentiment may drive prices, but over time, it’s the fundamentals that determine performance,” Mohideen says. Well-informed investors can use such downturns to rebalance portfolios, picking up fundamentally sound stocks at lower valuations.
Data backs the case for equities: in 2023, the Colombo Stock Exchange delivered a 25% return; in 2024, that figure rose to 50%. These returns far outpaced those from fixed deposits, which have struggled to beat inflation. “Given the risks in the country, the higher return is in the market. But you have to be patient,” Mohideen notes.
Unit trusts offer diversification and lower exposure to individual stock risks, especially for investors without the time or expertise to track markets. Yet, individual investors who are more risk-tolerant and informed can generate higher returns, according to Mohideen.
BRS’s research division regularly produces comprehensive reports on their core coverage, identifying potential stocks with timely updates. Additionally, they release strategy reports in January and June, highlighting sectors that may benefit from economic trends. Investors are also informed through macro updates, sector updates, budget reviews, and periodic reports. The ‘Stocks in Focus’ series highlights companies based on earnings potential and dividend payouts. Core coverage recommendations are grounded in detailed financial modelling, cash flow forecasting, and valuation techniques. Mohideen explains that a detailed analysis is done before a recommendation is made.
Despite the availability of such data, many investors fail to engage with it. Many investors overlook the importance of reading the full report, which can be a mistake. To make well-informed decisions, investors must read the entire report. Transparency and access to information have improved. “We offer a comprehensive research portal where investors can access all reports and webinars conducted by our research team. We encourage investors to use these tools to stay well-informed,” Mohideen says.
BRS has identified several sectors that may benefit from an improving macroeconomic environment. These include construction, consumer goods, renewable energy, and selective financial stocks. “We expect more activity in construction-related stocks aided by the government’s renewed infrastructure push,” says Mohideen. While some segments, like tiles, face margin pressures from imports in the short term, demand recovery and investment inflows should aid medium to long-term growth.
Consumer-oriented companies could also gain from higher disposable incomes, supported by salary increases and tax revisions. Meanwhile, she adds that banks may benefit from lower interest rates and a rebound in credit growth, which will continue to support growth and interest in the sector.
Renewable energy, particularly solar, is another sector to watch. Many listed players have historically focused on hydropower but are now looking to diversify. If project execution improves, renewables could offer long-term growth.
Fundamentally strong corporates have demonstrated resilience during crises. “If you look at COVID-19 or the aftermath of the Easter attacks, it was the larger, well-managed companies that came back stronger,” Mohideen observes. These companies have the strategic and financial capacity to adapt quickly and maintain stability through volatility.
Sri Lanka’s stock market remains relatively undervalued compared to regional peers. Trading at a P/E ratio of around 9x, compared to a historical average of 11-12x, there is room for re-rating if stability and reforms continue. “The outlook is positive if we can maintain a stable political environment and execute the right policies. But policy execution is key,” she says.
For investors willing to study market dynamics, diversify risk and remain patient, Sri Lanka’s equity market still offers upside. As Mohideen puts it: “There’s no one straight angle. There will always be volatility. But in that volatility, there is opportunity.” Ultimately, long-term investing in a sentiment-driven market comes down to preparation, diversification, and patience. Returns will not always be linear. Some periods will test conviction. But with time, informed investors who anchor decisions in fundamentals tend to come out ahead, Mohideen says.