SL poised to lead corporate earnings growth among Asian frontier markets in 2025

By Nishel Fernando
Sri Lanka is poised to lead corporate earnings growth among the Asian frontier markets this year, as the country enters a positive economic cycle, also supporting the valuation rerating story, according to a top fund manager.
AFC Asia Frontier Fund Co-Fund Manager Ruchir Desai noted that economies such as Pakistan and Sri Lanka have entered a positive economic cycle and that the worst is behind them. Therefore, in such nations, lower interest rates are leading to higher loan growth, higher consumption, increased domestic activity and stronger manufacturing activity. “So, you’re seeing earnings coming back. I think earnings will be led by Sri Lanka next year also. They’ve been very strong for the last six months in Sri Lanka,” Desai said during a recent webinar.
AFC expects the earnings momentum to continue in the Colombo Stock Exchange (CSE)-listed equities, with a 23 percent year-on-year growth this year.
Economic recovery is expected to drive the earnings growth this year, along with the ongoing success of the International Monetary Fund programme and its policies. The sovereign credit rating upgrades are adding to investor confidence and more crucially, the country is experiencing very strong political stability for the first time in years.

“You have a majority government in Parliament now and therefore, you know, for the last five years, you’ve not seen economic or political stability. What you have now is both economic stability and very strong political stability. So, I think that’s going to drive returns.
We saw that, for example, in the fourth quarter of 2024, once the presidential and parliamentary elections were through and there was a very strong mandate for the new government. The market rallied by 34 percent in the last quarter of 2024 and this year, already in the first three weeks of 2025. So, you’re seeing that momentum come through. I think Sri Lanka could continue doing well in 2025. I would say even for the next couple of years because they’ve got the stability back after, you know, five tough years,” he elaborated.
Sri Lanka could also lead returns among the Asian frontier markets this year. The price-to-earnings ratio of the CSE All Share Index stood at 12.2 in the first three weeks of this month, below its historical highs.
Desai also dismissed concerns that possible external events could lead to a notable depreciation of the LKR against the USD, ultimately raising concerns among foreign investors. However, he noted that domestic developments such as a political crisis could put pressure on the currency.
“If the investors are correct that the dollar is going to get stronger, that will affect some of our markets. I’m not so sure about that because like I said, many of our markets have entered their own positive economic cycle, which is not so much linked to what’s going on in US trade policy. 
And yes, you’ll have normal depreciation like in any emerging market, you know, 4–5 percent a year but I’m not concerned about 20 percent or 25 percent depreciation in the next couple of years, say in the case of Pakistan, Sri Lanka or Bangladesh. So, from that perspective, I think even though the dollar gets stronger in the next one or two years, our returns will still be pretty strong,” he added.
He also observed that the common investor perception of illiquidity in frontier markets is now outdated, given the performance of frontier markets, including the CSE.
“Many investors think the frontier markets are illiquid but that’s not really true. Vietnam’s daily liquidity on a good day is US $ 100 million. Pakistan is doing US $ 200 million a day now, in terms of daily volume and Sri Lanka is doing almost US $ 30 million a day,” he said.
Meanwhile, AFC Asia Frontier Fund increased its country asset allocation to 12.1 percent, just behind Pakistan, which stood at 19.8 percent at the end of last year. In December last year, the fund invested in a consumer conglomerate in Sri Lanka while strengthening its existing positions in the country.