Local Investors to Drive Sri Lanka Equity Market in 2026

Asia Securities PLC Chairman Dumith Fernando said Sri Lanka’s equity market in 2026 is expected to be primarily driven by domestic investors, with stable interest rates and rising participation supporting valuations even without significant foreign inflows.

Fernando highlighted three key factors shaping market performance this year. First, interest rates are projected to fluctuate within 50–100 basis points, unlikely to significantly alter asset allocation decisions. He added that equities remain broadly attractive compared to fixed income, supported by zero capital gains tax and a 15% withholding tax.

Investor participation has surged, with active equity investors rising to approximately 98,000 in 2025 from 60,000 in 2024, while new Central Depository System (CDS) accounts increased from 19,000 to 57,000 over the same period. In the first three weeks of 2026, about 5,000 new accounts were opened, reflecting growing domestic interest in equities.

Regarding foreign flows, Fernando said global capital is focusing on diversification rather than targeting emerging markets alone. Sri Lanka should not rely on foreign inflows to drive market returns, though any inflows would provide incremental upside. He noted that sustained improvement in sovereign credit confidence, including timely refinancing of external debt in 2028, is crucial to attract overseas investment.

Market liquidity remains a critical factor, especially for foreign investors who focus on individual stocks rather than the index. Fernando emphasized the need for more sizeable listed companies, including potential reforms in State-owned enterprises, to deepen liquidity.

Foreign interest is gradually expanding beyond traditional blue chips into growth sectors such as digital and telecom, but broader participation requires adequate market depth. On fixed income, local currency instruments remain attractive, though larger inflows would depend on improved scale and market efficiency.