Colombo Stock Exchange poised to become one of top performing frontier markets

• Positioned for strong growth despite challenges, says First Capital Research
• Points out timely completion of the External Debt Restructuring remains key challenge
• Estimates 20% increase in market, with banking and tourism expected to lead

By Nishel Fernando

Despite a lackluster start, the Colombo Stock Exchange is on track to become one of the top-performing frontier markets. 
According to First Capital Research (FCR), the robust recovery in earnings, particularly driven by the banking and tourism sectors, positions the Colombo Bourse to capitalise on global fund inflows, supported by a recovering economy and prevailing low-interest-rate environment this year.

The timely completion of the External Debt Restructuring (EDR) exercise remains a key challenge to realising this potential, especially with uncertainties arising as the country enters an election cycle later this year.

FCR’s Chief Research & Strategy Officer, Dimantha Mathew told Mirror Business that he sees significant upside potential, estimating a 20 percent increase in the market, with banking and tourism expected to lead, followed by possible support from the consumer and apparel sectors. 

He noted that as global fund flow shifts towards frontier and emerging markets away from the U.S., Sri Lanka, with its deep-discounted stocks, stands to benefit.
FCR anticipates the All Share Price Index (ASPI) to reach 13,500 points by the end of this year, projecting a 37.0 percent year-on-year earnings growth for 2024. 

Mathew acknowledged that the completion of the EDR is crucial for potential re-rating, allowing the index to showcase strong positive returns in the second half of 2023.
Commenting on the absence of a clear leader in the Presidential Election race, Mathew noted uncertainty on the election front as it may deter most investors from investing long-term. 

However, he also suggests a potential short-term boost in government spending and business activities due to elections, supporting economic recovery this year.
Mathew also observed a positive shift as Sri Lanka is seeing bond rates starting to come down significantly. He noted that once the overall yield curve falls below the 12-13 percent mark, funds may be transferred into equities.
Meanwhile, acknowledging challenges, Mathew said he remains optimistic about the market’s prospects.

“As long as we can get out of the default status, there’s high potential inflows to come in. Even if the rates come down with the EDR, I think the rates are attractive enough to attract foreign inflows. That will push up foreign demand and still the rate will come down through this. Anyhow, rates are likely to come down,” he said.