AFC Asia Frontier Fund increases Sri Lanka weight to 13.6% in 2025

• Maintain its forecast for multi-year Bull Run
• Views Sri Lanka as a “sweet spot” for returns driven by political stability, lower interest rates, and reconstruction-led growth

By Nishel Fernando

The Hong Kong-based AFC Asia Frontier Fund (AAFF) has significantly increased its exposure to Sri Lankan equities, raising its country weighting to 13.6 percent by the end of 2025 from 12.9 percent a year earlier, as it bets on a sustained economic recovery despite recent weather-related setbacks.

In its newly released ‘2025 Review and Outlook for 2026’, the fund managers revealed that Sri Lanka remained its second-largest country allocation globally, ranking just behind Pakistan (17.7 percent).

While the fund’s broad portfolio delivered a 19.7 percent return in 2025, Sri Lanka’s performance stood out starkly against mixed regional results. In contrast to Colombo’s resilience, the Vietnam market acted as a drag on the fund’s performance due to corrections in key tech stocks, while Bangladesh struggled significantly, ending the year as one of the poorest performers with a 2.3 percent decline in December alone. Conversely, Sri Lanka delivered a “good rally as anticipated,” ending the year as a top contributor alongside Pakistan.

The report highlights that the fund used market weakness in December 2025—where the local index dipped marginally by 0.4 percent—to accumulate more shares, signalling high conviction in the Colombo Stock Exchange.

A year-on-year comparison of the fund’s holdings reveals a deliberate strategy of doubling down on blue-chip recovery plays. Commercial Bank of Ceylon PLC has cemented its status as a top-10 global holding for the fund, accounting for 3.2 percent of the portfolio’s Net Asset Value (NAV). The stock delivered a 52 percent year-on-year profit growth, validating the fund’s long-term hold since 2019.

The diversified conglomerate Sunshine Holdings PLC remains a core pillar, representing 2.9 percent of the NAV. The fund also disclosed a successful new entry into Hemas Holdings in late 2024. This tactical move paid off in 2025, with the company reporting a 33 percent profit growth for the six months ending September 2025, confirming the fund’s thesis that consumer demand is rebounding.

The fund’s outlook remains bullish despite the economic shock from Cyclone Ditwah, which struck the island in late November 2025 causing estimated damages of US$ 4.1 billion.

“Though recent floods will have a short-term negative impact on the economy, we are not extremely concerned,” the report stated, emphasizing that Sri Lanka is in a “much stronger macroeconomic position” compared to previous years.

The fund managers identified a potential upside from the disaster, noting that post-disaster reconstruction efforts are likely to act as a fiscal stimulus. This is expected to drive activity in the construction and materials sectors, aligning with the government’s push for infrastructure development and digital modernization.

The fund argues that Sri Lankan equities remain significantly undervalued relative to the region. Trading at a trailing price-to-earnings (P/E) ratio of 11.7x, the market is cheaper than regional heavyweights such as India (23.9x) and Indonesia (22.3x).

“We believe the fund’s country universe is entering 2026 with the most favourable domestic macroeconomic and political backdrop we have witnessed in many years,” the report concluded, predicting a “sweet spot” for returns driven by political stability, lower interest rates, and reconstruction-led growth.