2026 sees the economy standing at a more mature phase of its recovery, transitioning from post-crisis rebound to an era defined by structural reforms, tighter fiscal discipline, and evolving investor expectations. The market is shifting away from broad-based rallies to one of greater selectivity, where valuation, earnings, and resilience are considered more favourable indicators than momentum alone.
The Colombo Stock Exchange (CSE) is overseeing an investment landscape influenced by global uncertainties, domestic reforms, and expanding participation through new products and listings. Against this backdrop, understanding the underlying dynamics of the Sri Lankan equity market is essential.
Niroshan Wijesundere, Senior Vice President of Marketing at CSE spoke to Echelon about the current state of the Sri Lankan equity market, outlining the risks, opportunities, and sector-specific dynamics shaping investor decisions in 2026.
How would you describe the current state of the equity market in Sri Lanka as we enter 2026?
The Sri Lankan equity market in 2026 is entering a phase of moderate growth and increasing complexity. Following strong recoveries from previous crises, the market is now more nuanced, with certain sectors rerated significantly. Certain sectors have demonstrated high price-to earnings ratios driven by companies that exhibit strong return on equity (ROE) and minimal capital requirements while other sectors, which continue to demonstrate mid-to-long term growth potential, face regulatory capital requirements and heavy taxation. It’s encouraged that investors look into all sectors to discover what is viable and learn about these underlying conditions that drive growth.
The market also reflects past fiscal discipline. The government achieved a primary balance surplus of nearly 5% of GDP in 2025, compared to an IMF target that was significantly lower. Meanwhile, total household exposure indicates resilience, with around 5.2 million households in the country and only about 95,000 houses damaged by Cyclone Ditwah, showing that overall economic impact, while serious, remains localised. Overall, the market is healthier than in previous decades due to stronger fiscal management, improved macroeconomic frameworks, and institutional reforms. As always, investors need to be selective rather than rely on broad market momentum.
What are the key risks and catalysts that investors should be aware of in 2026?
There may be certain risks that could influence market performance this year. Firstly, political developments, such as the upcoming provincial council elections, could introduce short-term volatility. Global events are also critical: the US midterm elections and potential market corrections in tech-heavy indices could affect investor sentiment and foreign capital flows. Domestically, delays in implementing major structural reforms, such as those under the Economic Transformation Bill, mean that growth may remain below its potential.
On the catalyst side, reconstruction and relief efforts following Cyclone Ditwah have introduced short-term eco- nomic activity in certain sectors. The improved macroeconomic framework, including new central bank laws, the Public Finance Management Act, and Public Debt Management Act, provides greater fiscal discipline and reduces the likelihood of runaway inflation or sudden currency depreciation. These reforms offer a more stable backdrop for investment in Sri Lankan equities, particularly for sectors positioned for sustainable earnings growth.
Which sectors appear most attractive for investors in 2026, and where should caution be exercised?
Investors should focus on sectors with strong fundamentals, sustainable earnings growth, and reasonable valuations. Food, beverages, and tobacco remain dominant in market capitalisation, and companies with high ROE and low capital needs continue to provide solid long-term potential.
Some companies in the market, particularly those that have seen rapid price appreciation without corresponding earnings growth, carry elevated expectations. Investors should be observant of multiple compression in these cases, which may result in stagnating stock prices. As such, stock selection is crucial. The “buy anything” mentality may not deliver consistent returns.
How do macroeconomic conditions, such as inflation and interest rates, impact investment strategy in 2026?
My understanding is that inflation in the early months of 2026 is expected to rise slightly due to supply shocks, especially in the agricultural sector following Cyclone Ditwah. Food prices have a relatively small weight in the overall Colombo Consumer Price Index (CCPI), but the temporary increase will be visible in reported inflation. Interest rates have also recently adjusted upward and so borrowing costs for quality borrowers may rise by approximately 1%, but this is unlikely to materially affect investment decisions for most institutional or retail investors.
I believe that the Exchange rate volatility may be moderate. The Sri Lankan rupee may experience small short-term fluctuations, but long-term depreciation is expected to be limited to 2–3% annually, given that domestic inflation is generally lower than that of developed economies. Overall, macroeconomic conditions are conducive for equity investments.
What should investors look to as they navigate the Colombo Stock Exchange in 2026?
The most important principle for 2026 is disciplined stock selection. Investors should focus on companies with strong earnings growth, sustainable competitive advantages, and reasonable valuations. It is better to avoid chasing segments where price growth has far outpaced fundamentals.
Diversification remains key. While certain sectors show stability, other segments may face headwinds due to structural or cyclical factors. Investors should also stay informed about macroeconomic policies, political developments, and global market trends, as these can create both opportunities and short-term volatility. Finally, look for companies that benefit from reforms or are positioned to capture long-term productivity gains, especially in export-oriented, digital, and infrastructure-linked sectors.
The end of 2025 saw 2.23 million tourists arrive, breaking the 2018 record, and as the tourism infrastructure remains relatively unscarred by Cyclone Ditwah, the grounds are set to reach the target of $4.5 billion in revenue and 2.7 million international visitors for 2026, In this context more in-depth analysis should be undertaken to determine the viability in investing in sectors related to tourism as well.
2026, in line with 2025, will also see a spate of new listed companies making their initial public offerings (IPOs), drawing traction, as well as issuances of new debt instruments developed by CSE, such as the GSE+ instruments. In doing so, we offer products for both the risk-averse and the risk-taker.
What remains paramount for all investors is financial literacy. 2026 will see CSE and the Securities and Exchange Commission (SEC) aggressively broad base, promoting Unit Trusts (Mutual Funds) for the average first time investor, and equity and debt products for the experienced investor. As the market develops, the financial education community continues to thrive, with CSE offering courses across different segments through the CSE Academy — highlighting the importance of financial literacy in maximising wealth and creating value. Ultimately, investing in shares remains one of the best ways to achieve superior mid-to-long-term returns.