AFC Asia Frontier Fund touts Sri Lanka as top pick for next 5 years

• Cites powerful combination of political stability, robust economic recovery, and attractive market valuations
• Despite a powerful market rally over the last two years, Sri Lankan equities are not considered expensive
• Trump tariffs to have an impact, but would not be a “game changer” 

By Nishel Fernando

Hong Kong-based AFC Asia Frontier Fund has identified Sri Lanka as one of its top country picks for the next two to five years, citing a powerful combination of political stability, a robust economic recovery, and attractive market valuations. The bullish outlook was shared by the Fund’s Manager, Ruchir Desai, during a recent quarterly investor webinar.

“Sri Lanka is a market we are very positive on... not just for this year but also going forward for the next two to five years,” Desai stated, highlighting the nation’s remarkable turnaround story.

The Fund’s optimism is rooted in several key developments including political and economic stability, broad-based economic recovery etc.  

According to Desai, the achievement of both political and economic stability following the election in late 2024 has been a “critical” factor. This dual stability, which he noted had been missing for the past five to six years, has fundamentally improved investor and business sentiment.

Desai pointed to a strong rebound in tourism, manufacturing, and construction. This is backed by impressive macroeconomic data, including 5 percent GDP growth in 2024 and a strong 4.8 percent growth in the first quarter of 2025. Furthermore, private sector credit is expanding at a robust 15-16 percent year-over-year. Despite a powerful market rally over the last two years, Sri Lankan equities are not considered expensive. The Colombo stock index trades at a price-to-earnings (P/E) ratio of approximately 11.7 times, which remains below its pre-crisis historical average of 14 to 15 times. 

“On a bottom-up basis, you still have some good juice in many of these stocks that we own,” Desai added, suggesting significant room for growth.

The AFC Asia Frontier Fund itself has benefited from its positions in markets such as Sri Lanka, reaching all-time high Net Asset Values (NAVs) nearly every month in 2025. The Fund is up more than 4 percent in July alone and has delivered impressive annualised returns of over 12 percent in US$ terms for the past five years, outperforming emerging and frontier market benchmarks.

The Sri Lankan stock market has been a standout performer, surging by more than 20 percent in US$ terms since the end of April 2025. This builds on a 45 percent gain in 2024 and a more than 50 percent gain in 2023. Desai believes this momentum is set to continue.

While the outlook is overwhelmingly positive, potential risks remain. The webinar addressed concerns over potential US tariffs, but Desai downplayed the direct risk to Sri Lanka, noting that exports to the US account for a relatively low 3 percent of the nation’s GDP. He argued that while tariffs would have an impact, they would not be a “game changer” for an economy whose recovery is primarily fuelled by domestic drivers.

However, investors will remain watchful of two key areas which include risk of correction and sustaining reform momentum. After such a significant multi-year rally, the market could be susceptible to a natural correction or a period of profit-taking. The long-term success of the recovery depends on the government’s continued commitment to economic reforms and maintaining fiscal discipline.