Transcription
I think we can continue positive returns that we've seen, which will result in Sri Lanka running a primary surplus and a current account surplus for the next 2 to 3 years. Interest rates are going to remain quite stable. So that is going to positively impact the equity thesis that we're talking about.
Yeah, I expect the rerating to happen across the board on fundamentally sound companies. Well, so I definitely think there's a lot more potential earnings growth will drive that once again. And so quite simply the portfolios will need to have higher allocation for assets with higher level of risk. I mean, it is definitely an opportune time to get into leverage. You have to be very cautious in terms of where you really put that money in.
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Cyclone Dwa left a destructive trail. The loss of life and damage to property happened all over Sri Lanka. It also spooked the equity market. Hello and welcome to Echelon's Investors Guide 2026. We're discussing portfolio allocation in times of uncertainty and what's in store for asset classes. In the studio with us today, Asanka Herrerat, who is CEO of unit trust and head of equities at Linear Wealth Management, Trisha Piris, who is head of research at Cal, and Bimmani Miagala, who is CEO of CT Smith Asset Management. Asanka, Trisha, Bimmani, welcome to Echelon. Bimmani, let's uh start with you and and just as a reminder, we are here in mid-December 2025. Uh, it's been uh a few weeks since Cyclone Dwa lashed out at Sri Lanka. 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?
Uh, right, Sham. So uh, let me start off that question answering uh, basically looking at like the more recent natural disasters that we've seen, example 2004 tsunami and the 2016 floods, and obviously we have the COVID and everything else as well. But what we've always seen is that the economy has had a sort of a temporary setback and then bounced back to its previous growth trajectory. Right? So, given the fiscal, monetary, and the external buffers that we have, this is probably one of the better times, or you know, in terms of buffers that we have to uh, meet an external uh, you know, a shock of this nature that we are positively poised. So, because of this, we feel that, you know, the bounce back will be faster and perhaps even smoother. Uh, so if you look at the growth forecast, uh, what we feel is the fourth quarter of 2025 growth and the first quarter, perhaps maybe the first few months might be slightly sluggish, but of course, uh, the next few quarters, we feel that there will be a strong bounce back. So, if you look at compared to our previous growth forecast, we have about a 0.5 to about 1% uh, deviation in terms of reduction in GDP of what we saw earlier on. So, again, the impact to this growth will be also milder if the reconstruction work uh, you know, completes or, you know, starts off and gets delivered at a faster pace. So, that's essentially in terms of our GDP forecast.
Do you anticipate uh, change in inflation expectations? You know, are you changing your inflation expectations from what they were?
Yeah. So that also is like a very interesting and a very timely topic. Uh, so if you look at inflation, yes, it's higher compared to the pre-Dwa prices that we saw, particularly on the vegetable side. But what is interesting is how it's sort of eased off on a week-on-week basis. In some categories, there is about a 50, you know, 50% reduction in prices, and on average, I would say it's about a 20 to 30% peak uh, Dwa and the prices now. So, obviously, it's settling down. Yes, there will be a milder increase that we see, but broadly under check is what we feel in terms of inflation also. So, in terms of interest rates again, uh, right now we feel, see that there is some uh, you know, particularly on the corporate side, we've seen the banks and finance companies giving higher fixed deposit rates. AWPR has slightly moved higher, but this is particularly, we feel, is that it's because of a liquidity, the market liquidity of 100 billion being sort of unevenly distributed. So, this perhaps will be, what we feel, is it's transitional, and interest rates also should normalize, particularly on the GC side, it's sort of eased off, particularly on the long end. Short-end treasury bill rates have been stable. So, markets are reacting, and we broadly feel interest rates are going to remain quite stable, given the macro strength that we are seeing.
Same question to you. You know, how did the cyclone lead you to change forecast focus? Did you change forecast and where were those adjustments most uh, noticeable?
Yeah. So, in terms of economic growth, I would agree with Bimmani as well. Our initial expectation for GDP growth probably has shaved off by about a 0.5%.
What was your expectation for?
About 4 and a half% for 2026. So, maybe about 4% or so for the next year. So, we're still quite positive on the economy as a whole. Uh, but I think in terms of the rest of the factors, for example, if you're talking about the fiscal side of things, right? Um, earlier the government had allocated 1.4 trillion or so in terms of capex spending. The thing is, it's just now being redirected towards reconstruction efforts rather than new building projects and so on. Um, as a result of that, there could be a timing change, right? Whereas we could have seen capex spend happening more towards maybe the second half of the year, once tender processes and all of that get approved, now we're going to see it happening a little bit faster in the year. Right? Whether this leads into bumping up our GDP expectation slightly faster compared to the DP would have initially expected from the cyclone, that remains to be seen in terms of how fast the government is able to act. But there are timing differences, for example, even in terms of the external accounts, right? We were seeing a good momentum in terms of consumer imports really picking up strongly. Now, we might see a little bit of a reduction in terms of particularly discretionary kind of spending. But on the other hand, you'll see construction materials, those kind of imports picking up faster and earlier on in the year. So, it's just kind of a timing difference, I would say, for the most part, rather than an overall outlook difference. So, in terms of our interest rate view, we're not really changing it too much. In terms of policy rate expectation, we did expect about 25 basis point reduction. That could potentially happen in 2026, that remains the same. Inflation has increased by maybe 50 basis points or so at most, but again, very much at the start of the year impact. We're not hitting the 5% levels or breaching that at all. Um, external front, it could actually be a little bit more positive, because they're getting the RFI from the IMF, 200 million, in addition to the IMF grant which was expected before, a little bit more in terms of aid, remittances a little bit higher. So, there's a balancing effect for sure that will take place. But at the moment, we're not seeing too much of a change in our overall forecast and outlook for 2026 as a result of the cyclone.
Okay. So, we'll get to discussing impact on markets, but again, macroeconomy, uh, has, has this led you to change expectations in an appreciable way?
As, I would say, what happened to the individuals and the communities directly affected by the cyclone is quite unfortunate. But our belief after the cyclone is that at an aggregate level, this will lead to a pick-up in economic activity and a pick-up in disposable income during the course of 2026. And therefore, um, we've actually marginally upgraded our GDP forecast for 2026. And given the future...
What is, what is the marginal upgrade like?
So, I think, um, if we're expecting about 4 to 4.1%, now we think that we might get close to about 4.4 to 4.5%.
Right. And given the fiscal buffers, uh, Bimmani alluded to, um, we are fairly comfortable that the rates will remain range-bound at these current levels, maybe move up by about 20 bips over the course of the year, and the currency should remain fairly stable. When I say fairly stable, maybe a maximum depreciation of about 2 to 3% during the course of 2026 from where we are. Um, I'm sure that during the course of our conversation, we'll go more into detail. But while as a Sri Lankan, what we faced was quite unfortunate, as an investor, we are probably more positive on the outlook for the year because we think the corporate profitability might be higher this year, while the rates will continue to remain range-bound. So, there is a silver lining in this whole thing, right, if you can call it that, right?
Sure. The impact was uh, unfortunate. Uh, what exactly leads you to suggest that, you know, economic growth will be higher than forecast? What will drive this additional growth?
So, actually, I was having this conversation with a client, and the best way to put it is that it's government works. I mean, this next year is going to be what you call the government works year. When assets get destroyed, it doesn't get recorded in your GDP as a negative. We may have lost, as an example, a decade's worth of infrastructure, but that is not a drag on your GDP. That is not a drag on your recurrent income, except to the level to which it disrupts economic activities. Now, let's say if the vegetable farmers can't sell their items because the roads are blocked, it will have an impact on the income. But all that impact, we expect it to be temporary or transitional, as Bimmani pointed out. But that assets have to get rebuilt. And rebuilding leads to both direct and indirect activities. Now, let's take a road and a bridge in the central hills. You have to build a road and a bridge means that there's direct money fund transfer from the government to the contractors. Um, you know, you have to buy the sand, the cement, what not. And let's not focus just not just on that. These individuals will come from the blue-collar worker category from the areas. They will get more money into their hands. They will spend that money for everything from sweets to chocolates to booze. So, there will be a pick-up in disposable income, which can translate into higher consumer spending than before. Because remember, I think all of us here agree that disruption to tourism, disruption to agriculture, all will be about three to four months, but the rest of the year will be all about reconstruction. So, that's why I believe that this will have a positive impact on the economy at the aggregate level.
Right. Uh, Bimmani, Sri Lanka has stuck to its budget, government budget targets. It's, it's an unusually stable period of outperforming your targets versus underperforming. Right? But does Dwa, kind of, put pressure on the government's ability to stick to this? And again, what's the fallout of that? What's the likely fall?
Right. So, essentially, we feel that, you know, uh, just after the elections also, that was one of the bigger concerns that investors have in terms of political stability and whether we will be in the IMF program. But it's quite clear that we are quite committed to being in the IMF program, and in fact, we've essentially outperformed uh, the targets. So, I feel that we will continue on this trajectory. And perhaps, I mean, given the magnitude of impact it had on the economy, we may be able to renegotiate some of the uh, headline numbers as well. But like what Tisha said, what uh, we believe is that the public investment budget that was there, about 1.4 trillion, will get uh, you know, sort of redirected into the rebuilding and reconstruction, which is about roughly works out to about $4 billion or so. So, we don't feel that there'll be a major issue in terms of fiscal slippage or revenue uh, drop in revenue collections. So, we feel that broadly that will be in line.
Can I add?
Yeah. Yeah. Go ahead.
I think to Bimmani's point, um, now government has about 1.2 to 1.3 trillion capex allocation. We...
That is for 2026?
That's right.
2026, and it has always been about a trillion and maybe slightly above, and we've rarely spent that...
That much money. So, there's at least usually has been about 400 to 500 billion rupees worth of annual buffer which goes unspent. And this buffer does not get deployed because of the administrative bottlenecks, etc. It's not limited to this government. It has always been the case. When a crisis like this happens, what happens is there's focus. So, this focus will mean that maybe what we don't usually spend in a year will get spent. So, to that extent, I don't think there will be a reallocation of government money because government doesn't necessarily need to reallocate because government has the resources for what they kind of plan. But what could potentially happen is that maybe because of the administrative focus shifts, there can be reallocation, is what I feel.
As, there is a capex budget which cuts across ministries or departments, right? Or functions, that is the one you're referring to. But there is likely to be an additional amount of money for reconstruction, right? Building, rebuilding the homes, uh, the roads, stuff like that. What's that number and what's that impact going to be?
So, essentially, um, um, we, we expect it to be about additional about 500, maximum of about 500 billion rupees this year.
And you expect that trillion plus to also be spent at the same time without a lag?
I'm not saying that I expect it to, but that gives a, essentially the headroom for the government to do so. Ultimately, what will happen is that things anyway take time, and this reconstruction will not be a one-year reconstruction. It'll possibly be a 2 to three-year reconstruction. But the key thing is that government has room without fiscal slippage to do it, both in rupee terms and dollar terms.
Right. Uh, Trisha.
Yeah, just to respond to that as well. I think the one issue that we have is the president did term it as a supplementary estimate, which seems to indicate that it's additional. But the constraint that we have is that we have to stick to the 13% of GDP in terms of a primary expenditure. So, as I said, it's not going to be a one-year impact. It'll probably be spread out over enough of a time period that it doesn't impact a one year's fiscal, fiscal targets essentially.
So, just wanted to add.
But uh, the 13% you're referring to is the goals under the IMF uh, program?
That comes in economic transformation, it's legislated now, certain targets. But as she said, that we, we should be able to work within those legislated limits.
Is it not practical and potentially feasible that Sri Lanka explains the situation, you know, and and adjust those targets? Isn't, isn't it the thing to do?
I think government will look to that, and that is probably why, um, that this IMF team who will come in January to discuss the fifth tranche. I think the, there's this belief that government had asked IMF to relook at it and see whether we can negotiate the terms, including the size of the facility, right? And it's entirely plausible the IMF will look at it in a very healthy, understanding way.
Because today, we not have, we just stuck to the IMF program. We have outperformed on almost all the macro indicators.
Right. And, and you're optimistic that, uh, generally Sri Lanka will, uh, the way it's going, can stick to the program to, to its end, which is, uh, still a year or more to go.
Yes. No, to put it in as an example, I, I mean, for 2026, previously we expected a primary surplus of about 900 billion rupees. Now, as I said, this event could lead to additional 400 to 500 billion. So, in the, at the, in the totality, there is room. It's a question of which line items would change.
Right. Let's look at, um, the potential impact on the two asset classes uh, around which most of you uh, will be familiar with, that is equity and fixed income, right? You've touched on uh, fixed income rates. What do you anticipate will happen, uh, Bimmani, if you kind of expand on that? What do you think versus three or four weeks ago, before the cyclone, your expectation, how, how has it changed for fixed income?
Yeah, so essentially, I think, given the macro buffers we are seeing both uh, in Sri Lanka, we feel that rates will remain fairly stable, uh, to start off with, essentially. Uh, I think Asanka also alluded to the fact that the government has 1.2 trillion as of August in terms of cash surpluses, which the government has been like using it quite in a healthy manner where there has been government has repaid more than the maturity amount. So, that is basically a broad positive signal that we see. And inflation, yes, there might be some pressure that we see, but broadly, we are still running positive real returns. So, there is space to cut rates if it's required to spur growth at a faster pace, and that probably we don't rule out even a rate cut in the first quarter. So, that remains quite positive. And the uh, third thing essentially is that globally, if you look at it, particularly with the US easing cycle uh, basically coming in, there is talk and debate whether they will do further rate cuts or not. But broadly, what we've seen is US has been in the easing cycle, and we've seen some amount of flows coming into the local government securities market. So, right now, it's at about 142 billion, where when we started the year, we were at about 66 billion. So, all of these are actually, you know, indicating towards the fact that the rates will remain quite stable. So, broadly, this low interest rate scenario will remain to be there. And if in case we saw, particularly when I was touching about the corporate uh, you know, corporate debt market, particularly with the fixed deposits and, you know, even the recent debentures, you know, being sort of, uh, the rates being spiking, is particularly, we feel it's transitional, like what I said. But, and there was a timing delay, a timing issue, uh, with the multilateral and bilateral money that was supposed to come to Sri Lanka. So, we were supposed to get about 700 to 800 million by, uh, maybe in the fourth quarter, which we feel will be now in the first quarter, perhaps in the first quarter of 2026. So, that 800 million which we were due, plus the RFI that we are expecting another $200 million, and the aid, and Tisha also alluded to the fact that we'll get higher worker, higher worker remittances because they've got to help their families. All of these are going to be quite positive, and we feel that this pressure, at least not on the government security side so much, but on the corporate side, what we see will also ease off, and the stable interest rate environment will continue to be.
I'll bring you in on equity. Uh, I think generally, you, the two of you have agreed on what you think will happen with fixed income. Uh, what do you anticipate will happen, uh, with listed companies?
As a result of cyclone?
As a result of uh, uh, the cyclone.
So, I think the sectors that will outperform and underperform are going to be different now. Right? So, there was a construction, for example, construction has been the most interesting topic because of reconstruction efforts and so on. And there was this natural build-up that was taking place with lower interest rates, credit growing. Uh, we were seeing the construction companies starting to turn around uh, over the last 12 months or so. This could potentially be expedited now. Right? Right? We were expecting the capex efforts of the government to definitely spill over into 2026 and result in better earnings for construction companies. But now, it could be expedited, right? Uh, but of course, the mix is slightly different. So, whereas it was more of a retail kind of driven spending, um, that was driving the construction sector thus far, now it'll be more larger, larger scale construction, rebuilding efforts and so on. But I do think that the lower interest rates will eventually also mean that retail still kind of continues momentum. Although there could be just a temporary setback in that kind of spending, um, consumer discretionary things like that. I think whereas that momentum was still there, I think the upside is probably a little bit dampened compared to what it was before. Might be slightly different view to what Asanka had. But we do think that there could be a reconsideration of what do people really want to spend on that they take at this particular moment in time, that might kind of everyone re-evaluates their decision-making that will happen. So, maybe second half is when we'll start seeing that upturn may be happening once again. So, it's really just in terms of what sectors start to do better versus what has lost momentum to some extent, uh, that changes in terms of corporate earnings.
Right. Do you, uh, have a number? Is there a universe of stocks that you, uh, follow? And what do you think will happen for those companies in 2026 in terms of earnings? Will earnings grow?
Yeah. So, I think I'll just give a view in terms of the overall universe uh, of listed stocks. I think at a broad level, we're expecting possibly about a 15% kind of increase for the year. This year, I think it has been a little bit lower than that because of the one-off losses that some companies have incurred. It was substantially higher if you take that out. Uh, but I think it's just, for example, banks contribute a lot in terms of earnings and earnings growth. Next year, we're not expecting stellar earnings performance from the banks. We saw obvious names have contracted. Uh, a lot of impairment reversals have been undertaken. There is, of course, a little bit left to go, but we also do see from the other side, the central bank is pushing a little bit more strongly for banking names to come off as well. There could be a little bit of a slowdown in terms of the lending momentum. I think overall, the banking sector has seen about over 25% growth in terms of loan lending for this year so far. Uh, and if I'm not mistaken, about 20% or so more of that have been going to NBFIs. Right now, NBFIs could be one of the larger impacted sectors because of Cyclone Dwa in terms of repayment capacity and so on, and they do not have as much buffers. So, that could be a temporary again reduction in terms of that loan growth momentum that we would have expected going into the next year. Again, it could taper off and pick up once again from the second quarter, even. But that is kind of a question mark in terms of where can banking, banking sector lending potential move. So, we're expecting maybe about 10% growth in terms of overall banking sector earnings. Right. That is in 2026.
Overall in the market, you're suggesting it's about 15%. Uh, were these numbers different? Uh, are these numbers different to what you expected before the cyclone?
So, I think banking sector earnings, we were probably expecting it to be a little bit higher. As I said, we were expecting loan growth to continue that momentum. We were expecting finance companies to probably continue performing really strongly. So, there are certain allocations that have been made, but there's a slight dampener in terms of overall corporate earnings.
Right. And, uh, just for reference, uh, what was 2025 earnings like across the market, or what do you expect it will be?
Um, I think including the ones with had one-off again losses, uh, I think it's about 10% for the year so far, up to September, if I'm not...
Okay. Can you, can you highlight what these one-off losses are, just so that we know?
Uh, that's, that's Bill LLC and Browns, if I'm not mistaken.
Okay. Right. So, if you actually exclude the exceptional earnings, last year, so then the earnings are substantially up, about 57, over 50%. And if that's year-on-year, and if you look at it, September, year-on-cumulative year-on-year, that's about 18% up. Uh, so, given those numbers, again, I agree with Tisha, we also believe that earnings will be at about 15% uh, in 2026. So, there is earnings momentum that is going to be there. Uh, and of course, to back these numbers, if you look at the standalone tax collections, right? So, on the corporate tax collection, this is obviously listed and unlisted, that's there is an increase of over 60% on the tax. So, which shows that this growth was predominantly driven by the private sector. Initially, in previous scenarios, we would have seen it was more driven by the government sector, but this time it was more private sector. Plus, the consumer-based taxes are up by about 40, 44, 45%. That also shows the underlying strength in the economy. So, yes, this is going to be a dampener, but we also, you know, need to remember the fact that the second phase of the public wage hike is coming in from January. So, that is going to be consumer positive, and the private sector wage hikes are generally that happens in April, and we've seen the real wages also sort of rising. So, all of these will also support by about the second quarter of next year to be consumer positive.
Uh, Asanka, of the three, you were the one who suggested it is going to result in high economic growth in 2026 than you had earlier anticipated. What will it do to uh, corporate earnings, listed companies?
I think, um, clearly, given the impact of the cyclone, there can be certain counters which can be adversely impacted. But now, we actually consider only about 70 listed companies, investable market liquidity, etc. Out of that, we have active coverage for about 50 to 54 companies. And going into this, uh, next year, we were expecting an annual earnings growth of about 20% across those 20, 50, 54 companies. Now, it's a mix, it's a basket. You have consumer, you have construction, construction material, etc. I think because of Dwa, clearly, I will expect about a 10 to 15% bump up on construction and construction material company earnings. And on certain select consumer companies, I would expect uh, earnings bump up, maybe starting from about towards February, March, onwards. That's because I think there'll be a general pick-up in consumer disposable uh, uh, income.
Right. And, uh, versus last year, do you think it's now, uh, more challenging uh, for investors uh, to pick winners? What, what factors do you think they now must consider in picking winners, uh, or what volatility must they now consider additionally than they were used to, uh, in the last couple of years, potentially?
Yeah, I made this joke at the beginning that next year will be a year fund managers will get either get hired or fired because I think dispersion of returns will be significant next year because there will be certain companies' earnings which will make it moderated, certain companies' earnings will be higher. Um, so my, usually what I tell is that anyway, when you are doing your allocation, figure out which sectors of the economy is picking up momentum. Now, we actually starting from late last year, we increased our allocations to construction, construction material, and reduced our allocations to consumer discretionary as well as banks. Because see, the economy was at the bottom in 2022. Then usually, when an economy is at the bottom, consumer defense, you do very well, and the risk is, the level of risk is priced in mostly into financial services. So, it made sense to have higher allocation to consumer defensive counters and banks, etc., in 2022. Now, as the economy recovers, you will get substantial, you would have got substantial return on those counters. But then, economy goes into where sectors like consumer discretionary do well. And if you take the consumer discretionary basket, construction and construction material is, except for the government and private sector projects, falls into this consumer discretionary, high ticket items. They are some of the last to do well, which is why we expected this year to where the economy reaches a certain level of stability, we expected that those that sector to do well. So, my advice is that usually, uh, the investors should look at what is the normal path of recurrent economy should follow. Now, given what Dwa has offered by simp, get the impact of Dwa, just I think what investors should do is that look what activities it is going to lead to. And also focus on the fact, the news items bringing into focus a lot of temporary factors. Inflation, if you really look at it, patty crop cycle is what, three and a half months, vegetable is about two months, poultry, depending on what life cycle can be longer or shorter. So, see through that and look at actual economic activities leading resulting in pick-up.
And, and by chance, you happen to be allocated into the right sector when you're not anticipating Dwa, because you were heavy on construction?
Yes. And that was by design because we were expecting the economy to go through those phases, and construction, construction material to be one of the last sectors to get, uh, pick up.
Given the current uh, scenario, have you kind of changed your allocation, asset allocation roughly across fixed income to equity? Are you in the same level of exposures to equity as you were post-Dwa, or, or do you see that allocation changing because of Dwa?
No, I don't see allocation changing because of Dwa. I think when the market even came down, we doubled down on our convictions. Now, there's a reason why we are continuing to remain bullish on risky asset classes as opposed to fixed income, right? Um, and that has a lot more to do than the cyclone. Since, if you look at Sri Lanka's interest rate regime since 1970, that is 55 years, interest rates have not remained at this level for more than one to one and a half years. 50 years. So, that means in Sri Lanka's most senior decision-makers also would not have seen a cycle like this. And for those last 50 years, what happens is that you stay into risky assets, get into risky assets like real estate, equities, then exit them at the right time, and then catch the peak of the rates and ride those rates for five years. I think most of us are in agreement, the rates are going to remain low for at least for another two years or so. When I say low, range-bound for at least for another two years or so. And that means we are going to go through a period of four years where the rates have remained at fairly moderate levels. So, that means there'll be quite a lot of institutional funds as well as individual funds which will have to take exposure into riskier assets. When I say riskier, not just listed equities, private businesses, real estate, etc. And that, that asset allocation change at the aggregate level is going to have significant implication for the overall asset pricing in this country. And that's why I remain continue to believe that in spite of the cyclone, risky assets, including listed equities, are probably going to generate higher returns.
Okay. A little while ago, you mentioned that you are anticipating 20% earnings growth for the 50 or so stocks that you are actively tracking. What was the earnings growth for those very stocks in 2025? Do you have a number?
Right.
So, I'm never really great with reported numbers, but I can tell you this. So, in 2023, when I looked at the next two years' earnings growth across those 50, 54 stocks, it was about annualized earnings growth rate of about 30 to 40%. Right? So, clearly, the earnings growth rate is going to moderate, but it's not a negative. It's a sign of an economy reaching a certain level and stabilizing. So, in a way, Sri Lanka's, would you agree that Sri Lanka's equity market has rerated higher? Trisha, has it rerated higher? Does earnings or the price to earnings ratio suggest that we have rerated higher? And are we not looking for another rerating in the immediate future?
Yes. So, I think at the start of 2025, I think we were trading at about eight times on PE, and now we're close to about 11 or 12 times. Right? So, there has been a rerating that has happened across the market. Um, if you, if you expect it to continue to stay this same momentum, or rather, stay at these kind of levels and expecting 15% kind of earnings growth, and you say the PE stays at this level, you're looking at a 15% ASPI growth, just keeping everything else constant, right? So, that is not the substantial returns as Asanka said that we saw in the last couple of years. So, it's, and it's not going to be market-wide as well, right? We're going to see, as we said, certain companies performing, say, or certain sectors performing really well, and certain sectors that tend to underperform. So, there's going to be that kind of mix, or rather, that change, shift in how someone looks at the market overall. Whereas previously, could maybe over the last, before the last 6 months, if anyone got into any number of stocks, you could have made a decent return. It's going to be a little bit harder to do that going into 2026. You have to be a little bit more savvy in terms of where do you expect earnings growth to come from the companies that you invest in. Will they beat the market earnings? Um, what is the potential for that? Are you looking at long-term value now, or short-term returns? There's also a lot of M&A activity that is going on that tends to kind of, uh, inflate sharp prices as well. So, those are all things to look out for in 2026.
So, when, when you say, uh, 11 to 12 times, uh, PE, are you referring to trailing 12 months, financial year, calendar year, roughly?
Uh, it's a trailing 12 months.
Trailing 12 months, right?
Can I add? So, I think I both agree and disagree with, um, Trica's view on this. So, I think the market has the potential to rerate a bit more. But I do completely agree with, and I always believed in this, you don't invest in the market, right? And given where the state of the market is going forward, you'll have to be more selective in what equities that you, at your portfolio. Now, well, I'll explain why I expect the market to figureate, right? I, I just touched on the point that Sri Lanka has historically had a much higher allocation to fixed income, um, than it should have, right? But even during this time, starting from end of the war, when the interest rates have remained at this current level, or even below, the market PE has been about 20% or so higher than this.
That is today?
Than today. But this is excluding those extraordinary kind of peace we had during, uh, 2009, 10, and 11. So, even excluding that, there is about, I would say, 15 to 20% rerating that can take place. So, with an earnings growth of about 20%, and with a rerating of about, let's say, 15 to 20%, I think certain select counters or a portfolio can be constructed where the return can be anywhere between 30 to 40%.
So, so the rerating you expect to be stronger, first in the construction, and then moving into, or has the construction rerating happened, and then moving into?
I would say, I expect the rerating to happen across the board on fundamentally sound companies and companies with sharp earnings growth. Like construction, rerating can be sharper. Now, as an example, I think the banks have the potential to, larger banks have potential to trade at a higher multiple than what it is, right? And this reality is going to be driven by the fact the Sri Lankan investor is captured to our sovereign borders. So, when the fixed income rates remain low, there are limited number of opportunities to get a higher return, and there will be a higher allocation to equities, which will naturally happen. Investors will be willing to accept lower, relatively lower equity returns than two years ago. So, they will be repricing.
All right. Uh, Bimmani, on the market rerating, what, what are your views? And if you look at sectors that are likely to, if you look at break it down into sectors also, are there ones that you think are particularly attractive because they are likely to attract higher multiples?
So, actually, I also agree that there is some amount of rerating that is warranted, because unlike in any of the previous times, yes, from about 2022, we've had like back-to-back positive returns. Yes. So, three years of positive returns. So, it corresponds with the positive returns we've shown in the primary balances plus the current account balances which have been positive, and the equity markets have been positive. Interest rates have continuously come down. So, in that sense, despite this short-term, you know, Dwa having an impact, we feel that the market rerating from about the current 11 to 12 times to 13 to 14 times is warranted. And also with the earnings, expected earnings are expected to moderate to about 15% of what we see, that earnings moderation is also giving you potential for a market, you know, upward movement in the market, right? So, one is the market rerating because of the underlying fundamentals remaining quite strong in the economy, plus the earnings also supporting this, uh, earnings growth momentum. So, in terms of sectors, I agree that it's not easy, it's not broad-based, you know, market rally that we will expect. So, there will be some sectors that will do quite well. For example, construction, everybody spoke. So, additionally to what my, you know, uh, panelists said, essentially, the other thing is in terms of the catch-up growth. If you look at it from 2018, yes, there was quite a bit of government, you know, sponsored projects back in the day. If you look at it on a peak-to-peak basis, we were down, but if you look at the GDP, we are down about 40%. Compared to the 2018 peak, so obviously in other sectors, we saw a massive catch-up growth, but construction, we saw like a limited catch-up that was happening. So, we were down 40%. So, this will actually let that rerating happen quite fast because that will be, and most of the companies have ample capacity that is there to deliver what is required. So, I think construction is like everybody's, you know, sweetheart at this point of time. Uh, so in terms of banks, yes, you know, if you look at historically, market multiples have been quite high. It had been at about 1.3 to 1.4. So, now it's at about one time price to book. And if you look at the credit to GDP ratios, again, if you look at the peak times, it was at about 40%. So, if you look at the credit to GDP ratios now, it's at about 28%. Right? So, there is some amount of credit that will happen. I mean, if you look at the total infrastructure damage, well, roughly, if you take a 80, it might be 80-20, where 80% might be government, 20% might be the private sector, right? So, that lending will come. So, we feel still the banks will be able to lend at about 15 to 17% lending growth will go, plus what we are seeing interestingly is that the ROIs are quite strong at about 17 plus ROE, and we feel, given the capital buffers and the liquidity situations there, they'll be able to continue this growth momentum. So, that's...
So, so what you're saying, I mean, while Asanka wasn't so focused on the banks, I mean, from what you're saying, you're saying there's potential for credit growth, significant credit growth, because, you know, it's now low, plus banks have traded at a at a higher multiple generally, one times book, now you're saying 1.3 to 4, which should suggest that, you know, these stocks are massively undervalued right now?
I mean, massively is a parallel, we have to be careful using market, it's a loose word. But let me put it this way, I think looking at the multiples, the multiples of the three large, especially the two largest banks, historically suggest can move up at least 20, 30%. Historically suggest. And then on the fact that they can be sub, there can be credit growth. And secondly, you know, the, the, the central bank directives etc., which formally allows the banks to give relief, ensures what it means is that there's relaxation of recognition of NPLs also. So, as long as the economy recovers and those businesses recover, that essentially means that the balance sheets of the banks may not really experience the full impact of the cyclone.
Immediately?
Right. But, uh, that will later come into...
Only if the economy does not recover.
Right.
It's very different from East attack. See, East attack happened, government, you know, they had to give relief to those borrowers. Then COVID came one year later. So, they, those NPL, those bad borrowers remain bad for extended period of time. Here, we are expecting this to be a one-off event. And as the economy recovers, even these, most of these borrowers will become, will be able to service their debt again.
Do you, do you approximately know what percentage of market cap is accounted for by the banks? Is it 20%, 25% approximately? Don't want to speak.
Over 20%, right?
It's below 20.
Over, over probably.
Probably over 20%, right? They, they used to be 40% at one point, right? When, uh, before everything went up, right?
What are, uh, as, so you're talking about, uh, Sri Lanka's economic trajectory now entering a period of period where there is no historical comparison, right? We are, we are, we've seen, uh, about two years of low interest rates, and we are likely to see another two years of of low interest rates, right? Um, how should a portfolio manager think about this now? Let's take the simplistic equation out, obviously, you need to be in, uh, in the assets that are likely to overperform. You're not going to be in fixed income. But if you, if you take that equation out, you know, how do you play this?
Essentially, portfolio manager has to consider multiple factors, including the objective of, I mean, and which is the primary driven by the objectives of the portfolio. So, the objective of the portfolio can be steady return or a longer period of time, periodical liquidity, etc. So, most of the portfolios, in that sense, will always have a fixed income allocation. But if I'm to answer your question, let me rephrase it, right? So, what should a portfolio manager do now, as opposed to any time in the Sri Lankan past, given the rates are going to remain low for an extended period of time? So, quite simply, the portfolios will need to have higher allocation for assets with higher level of risk. Now, that higher allocation has to be prudently decided. And when I say that higher allocation, assets with higher risk, I am not referring simply to listed equities. Real estate prices can move up, and real estate prices can continue to move up in a steady manner if the economy remains in this trajectory. Secondly, private businesses, return on those private businesses can pick up, and those can also be remain steady over a period of time. So, then you can look at an allocation of private equity, right? Or if your client has a private business, your advice would be, this is the time for invest for growth. Which is why I think, to, um, Tisha's point, there's a pick-up in M&A. Why is there a pick-up in M&A? Because people with capital identify this is the time to deploy money into business activities. So, in essence, higher allocation to listed equities, private equities, and private businesses, and real estate.
And, and if, then Trisha, there is no real comparison to the period that, you know, we are in right now, because of the extended low interest rates, right? Low rates tend to, uh, boost asset prices also, you know, what's your sense about, uh, leverage in assets, in in the markets, in liquidity, in equity, in particular, right? And what kind of impact effect will low interest rates over a long term have on the market? Because everybody sees this, right? Everybody sees that there is going to be a low period, and, you know, why not leverage?
Yeah, I would think it's probably a good time to leverage. I think it has picked up over the last year, but it's still not at any worrying levels that we have seen in previous peaks. It's probably not concentrated among specific stocks also that can have very large impacts on the index again, which is something that we have observed in the past. But I mean, it is definitely an opportunity, opportune time to get into leverage. But as, as we've been all talking about, you have to be very cautious in terms of where you really put that money in, right?
You can get caught to the wrong part of the cycle of the wrong stock and lose out significantly. But if you're at the right place at the right time, essentially. And that is, I mean, at the moment, if you're thinking about sectors again, e-construction is probably an easy one to think about. Um, you have to be placed correctly, but it would obviously be an opportune time to take it. Um, and I would expect leverage to increase going forward as well.
We don't have any official numbers on this, of course, across the market. But I wouldn't, it's not a concerning number, as a government governor had also kind of alluded to. It's not something that they're worried about or thinking about too much at the moment. So it's definitely at a very cautionary stage at the moment, but I think we'll see that start picking up going into 2026 as people take more positions.
Bimmani, as fund managers, to the two of you, I mean, do you deploy leverage, uh, in the market for any of the portfolios that you, that you're managing? And if so, how will you change or what has changed about the leverage that you're using? Are you using leverage?
So at this point of time, no. In terms of the mandates, we don't use leverage. So basically, we could look at it, but right now the mandates don't permit leverage.
Uh, so actually, I, she's right. The mandates don't permit. So we can't directly borrow for our mandates. But we work very closely with our clients. We do know that there are certain clients who are leveraging to fund the mandates that have been given to us.
Right? And one other thing, as to your original question, what, what the portfolio management can do differently is, a, we are going back to conversion. Me and Bimman having on commercial papers, right? I think if the economy grows steadily and remains stable for a while, corporate debt once again can become a very attractive proposition. And that corporate debt, special rated corporate debt, could be a way for investors to get a slightly higher return than your traditional fixed income instruments without losing the shirt.
And also to add on to what Asanka was saying, in terms of the real estate, we've already seen real estate had really picked up. I think 44% in terms of the Colombo-based condominium. So with this, like, you know, the floods that happen, we could also see some amount of internal migration that is happening. So Colombo and suburban areas might see that demand also happening, which could drive further the real estate demand, particularly in the Colombo and the suburban areas. So that's also probably another driving force which we could see.
Right, at, uh, at this point, which is mid-December 2025, uh, the sector, one sector that all of you talk about as being attractive, construction prices of stocks have gone, gone up significantly in the last two, three weeks, right? Is it still investable? Has, has what you anticipate already being priced in, you think?
No, I do think there's still a lot more to go. I think even if you're looking at a lot of the construction counters, some of the bigger names probably still trading below 11 times earnings, I would think on, uh, current levels. So, and the earnings haven't reflected yet, right? So it only has space more to readjust going forward as well. So I definitely think there's a lot more potential. Uh, earnings growth will drive that once again, as we said, as, as we've been all talking about. Um, so that's, there's a lot more potential, I think in construction.
Do you agree? Yes. First of all, we have fairly large questions, so I need to put that disclaimer in front of the audience. But the truth is that some of these construction material industries have, have been running large over capacity for at least two to three years, and they're still underutilized.
Sure. So there's room for volumes to grow.
Uh, in multiple, uh, subsectors of the construction material industry.
And yes, I agree. And I think the other thing is, like, now people are looking at this 11 because they were used to this six to eight times P. So 11 is like an expensive territory. So that's why we feel that when the earnings come in and the market, you know, there's confidence of a market rerating, obviously these market multiples will rerate because there is so much, uh, you know, over capacity that these companies have that they've built over years, and, you know, catch-up growth has not really, you know, kicked in in the construction side. So there is much more potential for the, for a earnings free rate.
So we're talking about mostly construction materials companies, like, like cement, like, uh, cables, like, uh, what else is there? Can you, can you throw us some, uh?
So the water pipe laying, uh, companies.
Companies? Yeah.
Aluminium.
Aluminium.
Right. Uh, uh, is there a concern that Sri, I mean, Sri Lanka is looking at, uh, liberalizing its import regime, and protected sector, relatively speaking, is construction materials, right? Recently heard that, you know, protection of that nature may not continue, uh, into the future. Is, is this likely to, are you accounting for this? Is that this likely to, uh, dampen, uh, the outlook for the sector?
I think removal of parat tariffs is, as a discussion is, has been, goes way back. I mean, if I can remember, it goes at least 12 to 13 years, and it hasn't really come through for different reasons. And one key reason is that, quote unquote, this need to protect domestic producers or need to protect the manufacturing industry of the economy. So whether a government actually go through with it or not might depend on the overall government policy, um, on this matter. There has been a discussion as to whether IMF program might actually push us towards removal of parat tariffs. My understanding, of course, is that when that IMF focuses on that fiscal and the external prudence, and as long as those higher ratios, high-level ratios are met, they are not likely to interfere with very specific government policy. So it will be a, it's a question whether the government will follow through. Um, so it'll depend on which direction the government will want to go.
Are there bellwether stocks or industries in Sri Lanka? I mean, years ago, John Keells was seen as, uh, bellwether for what will happen with the economy. Then banks were seen as bellwether for what will happen in the economy. Uh, are those, uh, kind of looking at these stocks in that light, still a relevant, uh, way to look at, uh, what the future of the stock market will be like?
I think banks are still a bellwether, right? And remember, just because a bellwether company's growth slowdown does not mean it's a negative for the economy. Yeah. And other thing is, uh, um, uh, also you, there are certain companies which focuses on general trade with a very widespread distribution. Some of these companies can also be good bellwether companies.
Yeah, I would agree as well. I think at the moment, in terms of overall, I think grouping it would be banks, and I think they will continue to be so. It's still very investable. Even if foreign investors look at Sri Lanka, they're looking at the likes of JK and the banks, and possibly some of the larger names like Kas and Sunshine, these are the top picks that they would have as well. Um, apart from that, there are obviously some conglomerates also, for example, like Hayleys, which is quite representative of the overall market, but it's not necessarily seen as much of a bellwether. I think that is something that is relatively undervalued at the moment as well. Uh, you could consider other conglomerates like maybe Spence, if you would want to as well. Of course, it has a little bit of a high exposure on the tourism side of things, but there are conglomerates that haven't necessarily been pieced together as being, you know, bellwether stocks for the economy overall. I think the closest representative would probably be Hayleys to something like JK.
Let's talk about a few of the consumer stocks, right? Um, uh, you anticipate that consumers will start spending maybe in the second quarter of 2026, maybe in the third quarter, you expect a rebound. Uh, do these companies have, in your view, the capacity, unutilized capacity, like you said, in some sectors, like in construction, even, right? That helps them meet the demand? How do you expect it to play around?
I think right now, the capacity is not the issue. So if you look at the overall GDP also, the capacity utilizations as of 2024 numbers were at about 64%. So like our channel checks suggest that it's improved to about 70, 75%. So there is still ample capacity that you could push through before the next capex cycle really comes in. So I don't think right now at this point of time, capacity is the problem. Right. So I think consumer's side, we are quite positive, despite, I mean, there'll be initially, you know, uh, setbacks, but broadly, given the wage hikes and the normal economic growth picking up, we feel that consumer, uh, will be quite strong. So like, consume, even like the telco industry, if you look at it, with the regional PEs, right? So our, I think data usage is somewhere like at about 40 GBs, right? But regional PEs at about 200. So there is quite a bit of potential, uh, in that space also, if you look at it, to ramp up. And now there is more pricing pressure because it's more of a three-player and the 5G rollout. So those are all positives for that sector as well. So insurance is also another sector, again, the penetration numbers are very low, maybe under 1% insurance. So the positive thing again for next year is that the IFRS 17, which is accounting standard, that is going to come through. So insurance, insurance valuations have been always quite complex, but with this accounting treatment coming through, there's more transparency, uh, in numbers where the investors will be able to better forecast profitability. I mean, there are, uh, CSM, where they call it the contractual savings margin. All of those will give an indication as to how a market would be able to look at the insurance sector as well. So that's also another interesting sector to watch out, particularly given this, uh, accounting standard going up. So export sector, I think that we forgot to really touch upon. So given we also expecting a marginal devaluation of the currency because of the, you know, foreign debt re-payments that we've got to make. Uh, so given that mild devaluation, plus the US tariff fairly being behind us, we feel that that market has settled down. With the US tariff cuts also coming through, the demand side in the US also should normalize. And the more interesting thing is right now, India and US is actually had come to an more of an advanced stage of trade deal negotiation. So the apparel manufacturers in Sri Lanka have quite a bit of capacity in India. So that could be positive. So that's probably one of the washed-out sectors, I would say. Uh, but more for a medium to long-term investors, because nobody has really looked at it because of the tariff, you know, spikes bringing in that uncertainty. So that's also another interesting sector, uh, to really take positions, uh, with a medium to long-term view.
U Trisha, foreign investment is now trickling into the market. I mean, it's, it's, it was up, it is still, it's still positive, I feel. I think, uh, what are the factors that you think foreign investors will look at? Because if they enter the market significantly, that can boost asset prices, and they will take a more long-term view on, uh, equity than do Sri Lankan some retail investors will. Uh, what should investors be looking at, uh, in terms of what is attractive for foreigners investing in Sri Lanka?
You're asking what type of stocks that foreign investors will invest in or?
It's, uh, could be, what do you anticipate will be, will happen with foreign investors? Will they continue to invest in the market? Will, will those holdings grow? Will they hold on for longer? What, what, what stocks and sectors do you think they'll be more attracted to?
Okay. So I think in terms of the conversation around foreign investment, I think we've been talking about this every time we, every time I've come on, and we've been waiting for that large inflow to really come in, and it hasn't materialized. Our macro environment has significantly been positive since, I mean, over the last several years, we've entered a period of, period of stability, and we're still not seeing it. I think it's not necessarily a Sri Lanka issue as much as it is kind of a global situation of foreign investors not really looking too much at frontier markets as a whole. I think even in Pakistan, it's relatively drying up in terms of foreign investment. Interest rates globally are coming down. So there could be some kind of turn that we will see. But of course, again, we said this last year as well, right? So a lot of the, even, even you look at the kind of the meetings and the investors that we talk to, um, there's a lot less interest. Yes, there's starting, like pieces of interest of, on, I would probably say from our conversation, it has been very much around the banks and a little bit of the consumer companies, um, but it's few and far between and not too much is materializing, right? It's very difficult to set up meetings. Those funds don't really exist, I think at this moment, compared to where, where it was 10 years ago, and those funds, my fund managers are no longer covering Sri Lanka, not covering frontier markets. So I think it's kind of a system issue rather than a Sri Lanka issue as such. But of course, I mean, the conversations, as you said, in terms of what type of stocks that they're looking at, is very much still the banking kind of stocks because they are a larger scale. You can get a little bit more volumes in them. It's not necessarily to say that they are the best performers, but that's what they can get into sizably. Um, and possibly the likes of Hayleys, again, Sunshine. Those are the kind of names that tend to come up. Um, I would probably say Hayleys is an interesting one if you're not looking at the banks, because they're very much on an expansion mode right now. Of course, that means that in the very near term, you're going to see their ROA a little bit compressed. So if you are a long-term investor, which investors tend to be, uh, that is kind of a good one to look at, excluding some of the banks, and again, Sunshine, uh, players like that would be interesting in that aspect.
Bimmani, what do you anticipate will happen?
I agree with Trisha, essentially. Global, if you see the FDI flows have halved, like from the peaks, it's halved. So it's more not a Sri Lanka story, it's a global story where foreigners are really not looking at emerging frontier markets. But having said that, of course, given the macro strength, US rates coming down, there could be a possibility that foreigners will have a look at it. And I think Vietnam really getting into the, uh, getting into the emerging market index will free up space for Sri Lanka. So the other angle, essentially, is that the Sri Lanka, if in case we get another rating division, I think that's going to be a huge P boost and a positive because right now we're just coming out of it. We are building our track record, right? So probably they might look for another year or two before they really significantly come down with money, is what we feel.
Regionally, say Southeast Asia and India, the valuations are like maybe more than twice what they are in, in Sri Lanka. Even in Southeast Asia, multiples are much higher. The price to earnings multiples are much higher. So, is that potentially a kind of indicator that Sri Lanka's market may look more attractive now that those multiples are higher? Is there money to be shifted?
I think Sri Lanka is attractive, right? But I think, uh, both Bimmani and Trisha covered one, I would say the fundamentally the reason why we are yet to attract substantial foreign flows. Then, I'm, there's another additional thing that we have to consider. Sri Lanka has not been investable, I would say, since about early 2019 for a decent-sized foreign investor. We had the Easter attack, which gave early signs, we that we will get into into a sovereign crisis. We ran into COVID. Then we had the economic crisis, and that is six years. The global or the front emerging and frontier market fund management space has substantially changed. As Trisha said, those fund man funds which used to invest in Sri Lanka no longer exist. Even if they exist, the fund managers haven't even seen Sri Lanka because fund managers have changed. So Sri Lanka will have to go through this process of being uncovered and rebuilding the confidence. On the positive side, our macro situation has never been more favorable than now, and it is likely to remain that for the next two years. So I do expect foreign inflows to come as foreign funds get more confidence. But so far, it has been underwhelming, and what comes through may not be as strong as what we would have wanted. But the key thing is, if the rates remain at this level, the domestic fund pool is large enough to unlock the value on the risky asset classes. And to me, that is the key thing. And just to, sorry, just to add to Asanka, like on the fixed income side, obviously we are seeing some flows coming through. So I think it's about, you know, we, we have to be in this track, continue, you know, pictures, and I think it'll work because obviously fixed income, slowly but surely, uh, we are building that confidence. So I think same, I mean, equity will be slightly later, but I think surely it'll come. It'll, yeah.
Okay, I'll, uh, ask you to take a minute each to put some final thoughts on, we'll try, start with you and, uh, go around the table.
On 2026.
On 2026. Anything you want to put finally on the table?
Um, so I think 2025 was a stellar and spectacular year in terms of equities. Um, it's going to be a little bit more challenging in 2026, as we've all been talking about. It's going to be really about picking those winners, um, in terms of the sectors, in terms of the specific, specific stocks that you would want to get into. Um, don't necessarily follow the herd, is probably the one piece of advice I'd probably give right now because there is going to be, as we've been talking about, a lot more money coming into the market. There is a lack of alternative, um, attractive asset classes, right? So large, by and large, pool of money will come in. Uh, but it's very important that you don't get caught, kind of caught up in what's going on, particularly as retail investors. And I mean, I don't manage a fund, so I would like to speak more to a general audience in terms of their investment. So be a little bit more cautious in terms of the type of stocks you're looking at, just because something has given you a 50% return, don't just jump on it and assume it has done well. Really look at the fundamentals of the stocks. Um, think about the earnings potential. What can beat market expectations in terms of overall earnings? Um, and, um, yeah.
That's fine. Uh, Bimmani.
Yeah. Uh, so in terms of the view for 2026, essentially, ditto is a temporary setback. So I think that is something that markets will come to, uh, realize when, uh, things really settle down. So I think, [gasps] uh, this interest rates are going to remain quite stable. So that is going to impact, or positively impact, the equity thesis that we're talking about. So the current macro fundamentals are quite strong. So if we continue with this macro trajectory, I think we can continue the positive returns that we've seen. But of course, not to the extent that we've seen in the last couple of years. There will be some moderation, but definitely it'll be twice as much as the fixed income returns.
I think 2024 was probably the easiest year to make positive equity return from point to point. I expected 2025 to get tougher, uh, because I've certain, I expect a certain sectors to outperform the others. So picking the right sector was important. Going into 2026, that is going to be even more the case. You may still make positive returns, but if you are to make strong positive returns, you will have to be very diligent and selective in terms of overall wave. The cyclone hasn't 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 witnessed over the last three to four decades, as a result of the IMF program, as a result of the Central Bank Act, as a result of the, um, other legislation that has been brought through, which will result in Sri Lanka running a primary surplus and a current account surplus for the next two to three years.
Asanka. Bimmani. [music] Thank you.