Budget 2026 sets stage for construction boom and equity market rally – CAL

By Nishel Fernando

The government’s Budget 2026 is laying a foundation for long-term fiscal stability while simultaneously creating significant tailwinds for the construction sector and reinforcing a major shift of investment from fixed income to the equity market. 

An analysis by CAL (Capital Alliance) highlights that while the budget focuses on fiscal discipline ahead of major foreign debt repayments from 2028, its immediate implications point towards a construction-led economic revival and sustained investor appetite for stocks in a low-interest-rate environment.

According to CAL Head of Research Trisha Peries, the rotation of assets from fixed income products to the stock market is a trend that is already well underway and expected to continue. 

With fixed deposit rates falling from over 20 percent to around 8.5 percent, the after-tax returns for many investors are less than 4 percent, pushing them to seek alternative asset classes for better growth. This search for higher returns, coupled with expectations of continued low interest rates and minimal inflation risk, has fuelled increased retail activity and rising turnovers in the equity market. CAL anticipates this momentum will persist, forecasting a robust 20 percent growth in corporate earnings for the next calendar year.

The construction sector has been identified as a “big winner” in the budget. The government has allocated Rs.1.38 trillion for capital expenditure in 2026, a clear signal of its intent to prioritise infrastructure development to drive economic growth. Peries notes that while large-scale government projects have had a slow start, tender processes have been speeding up and the benefits will begin to materialise in the order books of construction-related companies in 2026. This includes major projects such as Rs.104.4 billion for expressway development and upgrades to the national electricity grid.

This anticipated boom is expected to directly benefit several listed companies. Stocks such as Tokyo Cement are poised to gain, with the firm already seeing high clinker imports, driven by commercial and retail activity. Likewise, companies such as Access Engineering and cable manufacturers, including ACL Cables, Sierra Cables and Kelani Cables, are expected to see increased demand from large-scale infrastructure and electricity transmission upgrade projects. The budget’s plan to construct 70,000 houses for low-income families will further bolster the sector’s prospects.

Other sectors are also positioned to benefit from the budget’s proposals. The telecommunication industry is set to receive a boost from a five-year tax suspension on new tower constructions and incentives for data centres. Meanwhile, vehicle importers have a positive outlook, with a proposal to expand the state-run bus fleet with 600 new buses and provide other vehicles for government use expected to increase sales. However, Peries observes that demand for private cars and SUVs has begun to plateau, suggesting a potential tapering off in that segment next year.

On the consumer front, a key revenue measure is the widening of the Value Added Tax net by lowering the registration threshold from Rs.60 million to Rs.36 million. While this will bring more small businesses into the tax system and could lead to some price increases, CAL does not expect it to materially dampen consumer spending. This potential negative is likely to be offset by positives such as falling food prices, lower borrowing costs and a public sector wage hike.

However, the outlook is not positive across all industries. The plantation sector faces a potential challenge from a proposed wage increase for estate workers, which could escalate production costs. Peries commented that the impact remains uncertain, as the wage hike is not yet confirmed and the government has allocated funds to subsidise a portion of the increase. If implemented, it would most significantly affect mid-grown tea plantations, where labour constitutes a large part of production costs.

Overall, Budget 2026 presents a clear strategy of balancing immediate growth stimuli with long-term fiscal prudence. By targeting a primary surplus of Rs.860 billion or 2.5 percent of GDP and aiming to reduce its interest expenditure by Rs.33 billion, the government is shoring up its finances. This disciplined approach frees up funds for crucial public investments that are set to invigorate key sectors and in turn, sustain the flow of funds into the capital markets.