AFC strengthens Sri Lanka holdings as consumer spending surges

By Nishel Fernando

In a strategic move to capitalise on the evolving market dynamics, Hong Kong-based global AFC Asia Frontier Fund further strengthened its existing holdings in Sri Lanka and two other Asian frontier markets, Pakistan and Bangladesh, last month. 

This move reflects the fund’s strategy of capitalising on the long-term potential in key regions, despite the varied short-term performances.

The fund’s increased investment in Sri Lanka, its second-largest country allocation at 12.6 percent, is buoyed by the nation’s stabilising macroeconomic environment. The recent interest rate cut by the Central Bank of Sri Lanka, driven by low inflation, has spurred a notable comeback in consumer spending, according to AFC. This positive trend is directly benefiting the performance of the fund’s local holdings.

This conviction in Sri Lanka is rooted in both compelling macroeconomic indicators and strong corporate fundamentals, with the market continuing to trade at attractive valuations. At the end of May, the Colombo Stock Exchange’s All Share Price Index (ASPI) showed a trailing price-to-earnings (P/E) ratio of 10.8x and a dividend yield of 2.8 percent. Furthermore, the market’s low capitalisation relative to the nation’s GDP, at just 13 percent, signals significant room for future growth.

The success of this strategy is clearly reflected in the performance of the fund’s key Sri Lankan holdings. For instance, Hemas Holdings, a major consumer and healthcare conglomerate and the fund’s third-largest local position, has seen its net profits surge by 64 percent in the first quarter of 2025. The company’s stock has rallied an impressive 42 percent this year, outperforming the ASPI, yet it continues to trade at an attractive forward P/E of 9.3x.

Beyond this, other prominent local companies such as Commercial Bank of Ceylon PLC and Sunshine Holdings PLC also feature among the fund’s top 10 holdings. Sunshine Holdings is specifically highlighted as one of the fund’s ‘Asian Frontier Consumer Picks’, with a P/E ratio of 11.3x and a dividend yield of 3.6 percent, as of last month.