Sri Lanka and Pakistan are positioned to take the lead in South Asian frontier markets, extending their current market rally into 2025. This optimistic outlook is driven by ongoing economic and political reforms, low market valuations, a recovery in earnings, and a potential for greater political stability, as reported by the AFC Asia Frontier Fund.
As of October 25, 2024, Sri Lanka emerged as the second-best performing market index within the fund, boasting an impressive return of 29.7%. The AFC highlighted that both Sri Lanka and Pakistan are well-positioned for continued performance in 2025, noting that their price-to-earnings (P/E) multiples have not significantly re-rated, yet both economies are making steady progress.
The earnings recovery in Sri Lanka, alongside Pakistan and Vietnam, is anticipated to drive market growth in the upcoming period. The fund emphasized that South Asian frontier markets, particularly Bangladesh, Pakistan, and Sri Lanka, could experience relative outperformance in 2025 due to their reduced exposure to global trade dynamics. Factors such as macroeconomic recovery, ongoing reforms, favorable valuations, and earnings growth are all supportive of this trend.
The potential for enhanced political stability is expected to further boost the Colombo Stock Exchange’s (CSE) current market rally into 2025. Notably, Sri Lanka’s Central Bank has taken aggressive measures to cut interest rates, positioning it as a leading monetary authority among Asian frontier markets.
The fund’s quarterly analysis indicated that global monetary easing, earnings growth, and macroeconomic recovery, alongside discounted valuations, are key performance drivers. In September, the fund enhanced its portfolio by investing in a rubber glove manufacturer in Sri Lanka and an airport retail store operator in Vietnam. The fund also increased its stakes in Bangladesh, Mongolia, and Sri Lanka while reducing positions in Mongolia. As of September, Sri Lanka accounted for 7.4% of the fund’s country allocation.
At the end of September 2024, the portfolio included investments in 67 companies, 2 funds, and maintained a cash reserve of 4.1%.