The Curious Case of the Nepali Stock Market

2015 was the worst year for the Nepali economy in living memory. The destructive April earthquake followed by prolonged strikes in the southern plains and embargo by India over the promulgation of new constitution and demarcation of federal provinces inflicted deep wounds on the country‘s economy. Economy is expected to grow at the slowest pace in three decades and inflation rocketed to multi-years high as a result. The domestic stock market, nevertheless, shares a different narrative. Showing a stubborn indifference to the economic and political crisis, Nepal Stock Exchange (NEPSE), the domestic bourse, managed to stay afloat at higher levels. During the earthquake, the benchmark index of the country‘s capital market slipped down 10.70 percent before quickly rising by 15.43 percent to settle at 926.09 points in the month ending June, 2015. The market saw the repetition of the trend later that year when the Terai stir picked up followed by the economic sanctions by India. Defying the market forecasts, the index in August 20 touched 1,200.92 points when the agitation was in its full swing. Similarly, NEPSE climbed to 1,205.84 points to record a new high level in September 15 amid spiraling political and economic tensions. Proving various projections about a sharp slowdown or even a possible meltdown in the stock market after economic embargo came into effect in the third week of September to be wrong, the index retreated smoothly to touch down 1,169.30 points. The steepest decline the NEPSE witnessed was in November 29 when the index logged downwards at 1,022.77 points, second lowest after 837.83 points in May 27. This was followed by another decline in December when the local bourse recorded a fall of 2.91 percent to close down at 1094.57 points in December. The market has risen sharply since then to record new highs. As of the week ending in 25 February, the index has reached 1,283.25 points with the market capitalization of Rs 1381812.9 million which was Rs 1360500.29 in the week ending in 12 February. The market capitalisation of NEPSE currently stands around 60 percent of the gross domestic product. Stock markets are considered an integral part of the financial markets mirroring the economy of countries. Changes in GDP figures, employment data along with other economic statistics play key role in the movement of stock indices across the world. As the economies have become heavily interlinked over the past few decades, markets across the globe are likely to react to the changes occurring in economic figures in a particular country. A change of GDP figure or manufacturing data in China, for example, can push down or pull up stock indices in New York and London, and vice versa. However, the NEPSE figures clearly points to the fact that the domestic stock market is largely insulated from the harsh economic and political realities the country is currently facing, let alone the changes in global economy. "Our stock market is isolated from internal and external political and economic events,” opines Sujeev Shakya, CEO of beed Management, a Nepal-based international management consulting and financial advisory services firm. "The bourse does not correspond to the market fundamentals.” Analysts point out various reasons why stock market does not go along the same way the country‘s economy is heading. "Our stock market does not have the same composition as the country‘s GDP. For instance, there are no companies listed from the agricultural sector. The market is dominated by banking and finance sector,” says Niranjan Phuyal, Deputy General Manager of NEPSE. While it is difficult to exactly point out the factors that play a role in the Nepali stock market, a determining element in the recent bull-run is likely to be identified as high liquidity level in the financial system and low interest rate. Following the unfortunate events of earthquake, series of strikes in Terai region and ‘unofficial blockade‘ by India, investment-grade liquidity has been piling up in the Nepali financial sector as banks and financial institutions are unable to mobilise investments in housing-real estate businesses, automobile financing, industrial sector and other productive areas. Given the adverse macroeconomic environment, demand for loans for various purposes has dropped significantly over the past 9-10 months even with the BFIs offering low interest rates to lure borrowers. According to a recent Nepal Rastra Bank (NRB) data, Nepali financial system has accumulated Rs 180 billion of excess liquidity as of 22 Feb. This has prompted a huge flow of money into the stock market as investors find shares of listed companies lucrative compared to investments in other sectors. "Nowadays it is easy to borrow money from BFIs. The liquidity surplus has been pushing the interest rates downwards,” says Rabindra Bhattarai, former President of Stock Brokers Association of Nepal (SBAN). Another reason behind the bull-run can be traced in the performance of the banking sector. The number of BFIs is 193 accounting nearly 85 percent in the index which comprises of 235 listed companies. Despite the economic fallout of earthquake, Terai stir and India imposed embargo, BFIs have been demonstrating strong financial performance in the recent months. Backed by the NRB‘s policy subsidies in response to the financial damages incurred by natural and political disasters, the quarterly reports of BFIs have showed that the institutions are in fine health in spite of serious economic lockdown. "The banking industry is very healthy compared to other sectors. Shares of BFIs have garnered immense attraction over the past few years,” says Dr Rewat Bahadur Karki, Chairman of Securities Board of Nepal (SEBON), the apex regulator of Nepali securities market. The rising demand of shares of BFIs is primarily due to the new capital requirements of financial institutions. The central bank in July directed BFIs to increase their minimum paid-up capital by up to four folds within the next two years. The decision by the central banking authority has sent BFIs on a rights and bonus shares issuance spree in the recent months. In the meantime, the dematerialized or DEMAT system of share transaction has also contributed to the upward momentum of the NEPSE index. Aimed at full automation of share trading, SEBON on April 15 2014 launched the DEMAT system. The regulator has made mandatory for all listed companies to enter the electronic system from January 15. Due to the advent of new trading system, the clearance time of share transactions has reduced significantly. The clearance process is done within three working days, earlier which would take 7-14 days to complete. "The DEMAT system has reduced the time of clearance thus increasing the volume of share transactions,” says NEPSE Deputy General Manager Phuyal. Meanwhile, speculative trading has also been elemental in the domestic bourse. Investors are seen participating in trading activities on the information based on rumors, anticipations of political developments and herd instinct causing uncorroborated rallies or routs in the market. Nepali stock investors do not usually engage in proper financial analysis of the companies. Driven by rumors, they are focused on short-term capital gains than dividends of companies, experts say. Beed CEO Shakya casts doubt on the sustainability of bullish trend in the market. "The current bull-run is unsustainable. Analysing the past events, I see a risk of market crash in the near future,” he predicts. "The market is overpriced right now.” Analysts assert to the need of awareness among investors to avoid such unfortunate circumstance. "Investors should properly analyse return on investments before investing rather than focusing on share prices,” mentions Phuyal. SEBON Chairman Karki shares similar views. "Fundamental analysis of stocks is vital for healthy investments.” Experts also suggest various recommendations to ensure a mature growth of the stock market and increase its linkage with the economy. "Listing of companies is lower in the Nepali stock market. We need to encourage the real sector for its market participation,” says Karki. "A package program is needed for the purpose. This can be achieved by making arrangements in fiscal and monetary policies.” SBAN former President Bhattarai suggests promoting institutional investors in order to bring more maturity in the market. Analysts further recommend free pricing of shares in the initial public offerings to lure big companies into the domestic