Amidst Covid-19, the economic activities in Nepal have been shut for a month and a half now. The only stock market, Nepal Stock Exchange (NEPSE), is not also intact: NEPSE closed its transactions (both online and physical) on March 22. It is not likely to open unless the government lifts the nationwide lockdown. The last transaction before the lockdown shows a total turnover of over Rs194 million, with the index vaulting around 1250. Although NEPSE had remained bearish for a few years, the year 2020 kicked off with a bullish trend, the stock exchange making it to 1632 points on February 27.

Since then, however, as the pandemic started stifling the Chinese economy, the market started plunging until the lockdown was announced. Now, the situation is more than chaos: investors are uncertain which way the market will trend once it opens its floor for trading. Speculations of devastation are coming amid the world’s largest stock markets facing hard times. Every sector of the economy is in agony and it is hard yet to calculate the economic costs of this strife on sectors. Moreover, nobody knows when this pandemic is going to end. Therefore, for possible market interventions from both regulators and market participants, it has become important to analyse the possible influence of the outbreak.

It is always difficult to prophesise on the performance of small and imperfect capital markets such as Nepal’s due to the firm grip of a few major players. Let us remember that it is the same market which had increased to a historical level during the post-earthquake period. But the current crisis is different from what the market has faced in the past. The major difference between then and now is a shutdown of every sector this time. More specifically, NEPSE this time does not only seem dependent on the performance of listed companies but also the other sectors of the economy. Additionally, the capital market does not seem aloof from crisis spillovers from external economies either, from the point of view of remittance inflow and international trade. Nevertheless, this may not be the case given the nature of the economy and players of the capital market we have. It will be wise to analyse the influence of the pandemic on the performance of listed companies and overall money supply in the market, which is affected by remittances and hence the performance of foreign countries. Equally important is the crucial analysis of the type of investors we have.

The effect on the performance of listed companies

According to the annual report published by NEPSE, banks and financial institutions are the major players with a market capitalisation more than 65 percent of the total, followed by insurance companies (15 percent), hydropower (5 percent), manufacturing (3 percent), hotels (1.7 percent), and trading (0.09 percent). It is important to note that the most-hit sectors are hotels and manufacturing. The impact on financial institutions’ balance sheet will not be vicious given that the demand for loans will increase once the government reopens the economy. This may cause a liquidity problem in the market, but Nepal Rastra Bank needs to be prepared to inject the required liquidity. Only if the crisis continues for a long time will it affect the performance of BFIs.

Global statistics are showing that the rate of deaths due to Covid-19 is decreasing gradually, indicating that the world will get back on its foot soon. However, the tourism industry or hotel industry will face aftershocks of this pandemic for longer than what other businesses are likely to face. As Sujeev Shakya argued in a recent column, a larger portion of revenues collected by the tourism industry is from domestic tourists (more than 60 percent). This sector will also bounce back sooner than expected. More importantly, as far as the capital market is concerned, the hotel industry’s influence seems trivial; the total market capitalisation of the hotel industry in NEPSE is about 1.7 percent. Likewise, with the negligible participation of the manufacturing industry and trading businesses, NEPSE seems immune to larger shocks for now.

More importantly, once the market reopens, these sectors are likely to bounce back almost as quickly as they declined. The initial public offerings in the pipeline from the insurance sector are also likely to increase economic activity in the market.

Effect of money supply and behaviour of the investors

Given the fact that some of the Gulf countries’ are putting pressure on the government to take back Nepalis working abroad home and that oil prices are plunging, the flow of remittance will decrease for a few months in the future. The declining remittance will not only hit the supply of money in the financial system but also the disposable income of the households. This situation, to some extent, is likely to hit the stock market. However, if the central bank plans accordingly to overcome such anomalies, the liquidity in the market can be maintained. Similarly, since the government is also expected to come up with some stimulus packages with its federal budget for the coming fiscal year, it will also give impetus to the economy. In this period, due to apprehensive small investors, the pressure will be from the supply side. Either to finance their consumption requirements or to overcome the liquidity crisis, small investors are likely to increase the supply of stocks selling in the market at the beginning. However, another important point to note is that major players in the market are institutional investors. The public who are dependent on remittance money are not active participants of the stock market.

Although there is no straightforward way to predict the performance of the stock market in the future, with the type of the economy and stock market Nepal has, it can be argued that the stock market will not decline severely. But, it does not mean that NEPSE will remain intact. Of course, there will be some upheavals at the beginning, but it will not last long. Let us not forget that the stock market is already bearish (last at 1250 points). This indicates that share prices are already at their minimal level; a further plunge of a few points will be enough to entice institutional investors and create the demand in the market again. Therefore, it would not be a surprise if the stock market will be the first to recover from Covid-19. 

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