First Capital calls for profit taking while betting on banks and construction

Investors at the Colombo Stock Exchange (CSE) have been advised to adopt a more defensive strategy and book profits, as the market’s stellar run in 2025 has pushed valuations beyond sustainable levels. 

In its latest equity strategy report, First Capital Research (FCR) has downgraded its exposure recommendation, urging investors to reduce their equity portfolio from 100 percent to 85 percent and raise cash holdings to 15 percent.

The strategic pivot comes as the All Share Price Index (ASPI) breached the psychological 23,000-point mark in November, recording a year-to-date gain of approximately 43 percent. 

According to the research house, this surge has driven market valuations to trade at a premium compared to the 18-year historical average price-to-earnings ratio of 12.0x. Analysts note that the index has now surpassed FCR’s estimated fair value range of 21,000 to 22,000 points for 2026, suggesting that the upside potential from current levels is limited.

While the call to trim positions is driven by high valuations, the underlying corporate performance remains robust, though normalizing. FCR estimates that listed corporate recurrent profits will jump by 25 percent Year-on-Year (YoY) in 2025. This figure specifically excludes significant one-off distortions, such as the impacts from International Sovereign Bond (ISB) reversals and a massive Rs. 110 billion gain from LOLC, providing a clearer picture of core operational health.

However, this growth momentum is expected to taper off in the coming year. Earnings growth is projected to normalize to 16.6 percent in 2026, reflecting a cooling of the post-crisis recovery pace. The research house identifies the primary drivers of this growth as the Banking & Financial Services, Consumer Staples & Retail, Capital Goods, Construction & Infrastructure, and Export-Oriented Industries.

Despite the overall defensive stance, the report identifies specific sectors that are poised to outperform due to policy support and macroeconomic conditions.

The Banking and Finance sector is expected to benefit from a persistently low-interest-rate environment and stronger business activity. FCR projects private sector credit growth to rise by 12 percent in 2026. This expansion is set to strengthen fee and commission income through rising trade finance volumes and digital transactions, while improving macroeconomic stability is likely to reduce impairment pressures.

The Construction sector is also flagged for potential growth, supported by the 2026 National Budget which has allocated Rs. 342 billion for road development and Rs. 91.7 billion for irrigation systems. The sector has already shown strong momentum, with the Purchasing Managers’ Index (PMI) for construction hitting 67.6 in September 2025, the highest activity level since late 2021.

In the external sector, Tourism remains a bright spot, with arrivals already exceeding 2018 levels. The completion of major projects like Cinnamon Life and the new gaming bill are expected to attract a new segment of tourists, boosting city hotels. 

Meanwhile, Export-Oriented Businesses are predicted to gain from the depreciation of the rupee against the US dollar. While the apparel segment may face headwinds from tariffs, diversified export firms are well-positioned to capitalise on the weaker currency. 

(NF)