• Index eases approx. 500 points from all-time high of 23,659 amid volatility
• Consolidation needed as valuations no longer ‘cheap’: Analysts
• Investors expected to stay in equities despite limited alternative assets
• 2026 outlook calls for reduced exposure, careful stock selection

Recent volatility represents a welcome consolidation phase for the Colombo bourse, following the historic bull run in 2025 during which the benchmark All Share Price Index (ASPI) rose from 16,000 basis points to exceed the 23,500 basis point level, market sources note.

Speaking to The Sunday Morning Business, First Capital Holdings Chief Research and Strategy Officer Dimantha Mathew pointed out that the market had been somewhat volatile over the past week, as prices had reached a level where they could no longer be considered cheap.

Accordingly, he stated that the current market movement appeared to be a correction and that it would be beneficial for the market to stabilise at the current levels for some time before the next upward run. 

Mathew expressed the view that consolidation at these levels would be healthy for the market, helping to prevent overheating following its record-breaking bull run.

“If the market is stagnant for a while, it will be good for the market; it will be healthier. Fast movement upward can also bring it down faster,” he stated.

He added that it was unlikely that investors would exit the equity market, given the limited attractiveness of alternative asset classes aside from real estate.

Commenting on the outlook for the equity market in 2026, he stated that while their view was not overly negative, they were advising a slight reduction in equity exposure. Accordingly, he noted that equity investors would need to exercise careful stock selection in 2026.

“Since the market is overbought, our advice is to reduce exposure somewhat. Comparatively, it is no longer extremely cheap now. Therefore reducing exposure will be a good way to reduce risk,” he stated.

The ASPI has been on a downward trend since reaching its all-time high of 23,659.70 basis points on 13 November, during which the market has declined by approximately 500 basis points to around 23,100. 

Prior to this correction, the ASPI experienced a historic bull run, surpassing key milestones of 20,000, 21,000, 22,000, 23,000, and 23,500 basis points for the first time in its history.