Although it has been Asia's best performer since 2009 with a nearly 370 percent gain from Jan 1, 2009, foreign investors have been net sellers since the island nation's 25-year civil war ended in May 2009.
Here are some questions and answers about the trend:
WHAT IS THE FOREIGN INVESTMENT TREND?
Offshore investors have been net sellers since the end of the war in May 2009, to the tune of 29 billion Sri Lanka rupees .
Between Jan. 1, 2009 and the end of the war, they were net buyers of 1.4 billion rupees' worth. The outflow at the end of 2009 was the first since 2001.
WHY ARE FOREIGN INVESTORS SELLING?
The local Securities and Exchange Commission officials and some analysts said the outflow was due to profit-taking after long-held shares surged on anticipation of peace after three decades.
Foreign investors in the post-war period have been buying in when the market dips, then selling for short-term gains.
However, many analysts said foreign investors were selling because of longstanding concerns about the lack of shares with a sizeable free float, lax insider trading regulations and now, valuation.
Sri Lanka's market is trading at a forward price-to-earnings ratio of 17.9, highest among emerging markets, compared with 13.2 in Asian markets and 12.3 in global emerging markets, Thomson Reuters StarMine data showed.
The CSE is of one Asia's smallest bourses with a $21.2 billion market value and daily average turnover of $21.7 million. Though the SEC has promised to address the liquidity and insider trading concerns, analysts say offshore investors will wait until the measures have been implemented.
Some foreign investors do not want to invest in the markets are gains in the bourse are not totally driven by fundamentals, amid speculative trading and large purchases by government funds.
ARE THERE ANY MACROECONOMIC CONCERNS?
Yes. Although Sri Lanka's economy having grown an estimated 8 percent last year, which will be a 32-year-high if confirmed, strong post-war corporate expansion has yet to be seen.
Though private sector credit growth hit 23 percent by November, there has not been significant borrowing by companies for growth.
Analysts say foreign investors are also waiting to see the translation of post-war optimism into real economic growth.