The Nepal Stock Exchange (NEPSE) index was wallowing below 1200 points during the first quarter of the current fiscal year. An interesting thing to note is that although the economic indicators as provided by the government are in a good condition, the NEPSE looks like it is moving independently of them. For example, the liquidity problem, one of the critical factors affecting the performance of the stock market, in the banking industry is at a satisfactory level, the country’s trade shows some improvements with decreasing imports and increasing exports, remittance is increasing, economic growth is reckoned to be above 6 percent, and more importantly, the country is on a stable political footing. In fact, no season in history has enjoyed political stability as the current period is doing.

Despite such a favourable environment, the stock market has not been able to rise which is making investors nervous by the day. The same situation can continue this economic year, given that the regularity bodies have not been able to push the stock market back into a bullish trend and meet customers’ expectations. For instance, the monetary policy for 2019-20, which has a direct influence on the financial market, has failed to revive the stock market. As a matter of fact, the NEPSE has been in consistent free fall since the policy was enforced in July 2019. Within this period only, the NEPSE index dropped by 165 points.

Different opinions

These statistics are bringing forth different opinions from stakeholders: Economists have been arguing that lack of economic activities, trade deficit, and lack of appropriate policies are the major causes of the recent bearish mood in Nepal. Likewise, arguments have surfaced that lack of technological innovation and problems in the online trading system are further reducing transactions on NEPSE. Investors, on the other hand, are arguing that the stock market is operated by a handful of people, and they are manipulating it for their benefit. Some even argue that Finance Minister Yuba Raj Khatiwada’s reluctance is also playing a role in maintaining the status quo at the stock exchange.

What is lacking in their arguments is operationalisation of the bearish NEPSE. The point is that since the NEPSE has been hovering between 1300 and 1100 points for two years, it has to be analysed whether we are arbitrarily expecting the index to soar. Therefore, given the current economic facts, the NEPSE index remaining below the 1200 mark may not necessarily mean a bearish NEPSE. Nobody has calculated the benchmark for the NEPSE to be construed as being in serious freefall. Therefore, it is time to analyse if we are expecting the NEPSE to go up unnecessarily. In other words, are we sure the NEPSE was in a bearish mood for the last two years?

For this, we have to analyse the performance of both the Nepal Stock Exchange and the listed companies during the past years. Statistics show that the NEPSE has had some unusual upheavals. The NEPSE index was below 1300 points until the third quarter of fiscal 2015. However, as the fiscal year 2016 started, the NEPSE was unstoppable and reached an all-time high of above 1800 points. But that didn’t last long; and by the end of 2016, it had plunged to 1200 points. Now, the point of the argument is what caused such an anomaly in the Nepal Stock Exchange given that the economy was stifled by an earthquake and a trade embargo by India?

Here, the key was the monetary policy of 2015-16 which was decisively targeted at reducing the number of banks and financial institutions by increasing their paid-up capital requirement fourfold. This was also the period when shares of banks and financial institutions were popular for their high prices and earnings on the NEPSE. Taking this fact as an advantage, banks and financial institutions, mainly commercial banks, raised their paid-up capital by issuing more rights shares, bonus shares and further offerings instead of going for merger and acquisition. And the stock market, filled with naïve investors, soared.

The same trend continued until the first quarter of 2017 with some ups and downs. Since then, the NEPSE has been falling and fluctuating between 1100 and 1400 points. Therefore, this one-year period from 2016-17 changed the view which Nepali stakeholders have of the stock market. And this is where the problem started: When the stock market was skyrocketing for only one reason, the infestation of the market by shares of banks and financial institutions, nobody was wondering; but when the stock market started falling for some reason, decreasing the return on investments, everybody is worried. This is nothing but immaturity of both investors and policymakers in Nepal.

The point to note is that the NEPSE could not be expected to vault over 1300 points in the current economic situation. Given a prolonged and severely widening trade deficit which is resulting in remittance going back overseas, consistently negligible foreign direct investment, and a decreasing tradable sector of the economy, the stock market cannot be expected to go up rapidly. On top of it all, Nepal is an agriculture and service-based economy. And among the service industries, the retail sector is a significant contributor to the economy (about 25 percent of the GDP) but it is not listed on the exchange market.

Domination of banks

The manufacturing industry is also shy of getting listed on the stock exchange. The contribution of the manufacturing industry to the NEPSE is negligible (its market capitalisation is as low as 3 percent of total capitalisation). So, the banking industry is the major player in the NEPSE, holding more than 60 percent of market capitalisation. However, their performance has not been as expected. Frequent liquidity problems, unhealthy competition due to a large number of institutions, and lack of investment areas due to the small size of the economy are the reasons behind the banks not performing as well as expected. For example, Nepal Rastra Bank’s statistics show that although profits are increasing for banks, the return on equity of commercial banks is below 15 percent. With this kind of return, we cannot expect this industry to have a bullish trend in the stock exchange. And unless the banking industry gets impetus, the NEPSE will not go beyond what it has been operating with for the last two years.

Therefore, what investors, policymakers and the general public have to understand is that the current trend in the stock exchange is a natural phenomenon given the current economic indicators. We should not expect an unusual rise in the NEPSE in the current situation. A policy, of course, can change its course (such as the monetary policy 2015-16), but what they have to understand is that such manoeuvres will cause upheavals in the market instead of bringing stability. And this, for a developing country like Nepal, is not a good alternative. Therefore, in the present context, emphasis should be put on enhancing economic activities in the country to strengthen the stock market's performance. Due attention should also be given to reducing market imperfections such as information asymmetry, cartelling, technical inefficiencies and the woes of small investors. This will help Nepal build a stable stock market. Similarly, expanding the capital market throughout and outside Nepal is also essential for the Nepali economy in the current situation.

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