The Nepal Stock Exchange (NEPSE) is as dramatic and misleading as Nepali politics. Following a sudden change in the government and the emergence of a new coalition on March 4, NEPSE made some unnatural moves on its already random track. It soared up and closed with three consecutive bull circuits as quickly as the market opened on March 4 and reached 2,100 points on March 14. With these came the arguments that the unusual movement was a positive gesture towards the leftist coalition. However, it started losing momentum and has plunged consistently since.

The stock market’s reaction to political changes is always irrational. Changes in government and political ideology inevitably influence the market due to shifts in policies and regulations. However, this is not the case in Nepal. Though Prime Minister Pushpa Kamal Dahal reshuffled the cabinet, his ideologies remain unchanged. So, what is wrong with NEPSE? Despite the government’s claim and some macroeconomic indicators showing a rosy picture of the economy and stock markets in the world booming, why has the capital market remained bearish? Or is it really bearish?

Before understanding what is happening with NEPSE, one must identify the relations between stock markets, politics, economics, and investor sentiments. Generally, stock markets are accepted as the barometers of an economy: They reflect how individual firms are performing on the micro level and the overall economy on the macro level. The better the firm’s performance, the higher the valuation on the stock market, as investors expect higher dividends and returns on their investments. Similarly, in a conducive economic environment, firms have better growth prospects with lower interest rates, controlled inflation, increased government and private investment, and political stability. Under these conditions, a rise in the stock market is considered justified. However, unusual, sudden changes in stock markets due to political upheavals are a short-term misleading risky game.

NEPSE has no relation whatsoever with political and economic ideologies, political leaders, the performance of the listed firms, or the economy’s performance. If anything, its behaviour is inversely correlated with the economy. In fact, NEPSE has never reflected the actual economy. Whenever Nepal’s economy was devastated, NEPSE hit record-high performances. Be it the 2015 mega earthquake-induced economic crisis or the 2020 Covid crisis, NEPSE made historical records. Just a month after the mega earthquake in April 2015, NEPSE began to rise, further fueled by the monetary policy of 2015/16, which mandated commercial banks to maintain a paid-up capital of Rs8 billion, NEPSE hit an all-time high record for that period in July 2016. During that period, Bank and Financial Institution (BFI) shares were considered cash cows, trading at over Rs3000 per share. Taking that advantage, BFIs flooded the market with their right shares and further offerings to meet the required capital, which devastated the market and dragged their prices below Rs1000, causing naïve investors to lose their investments. During that period, the economy was growing negatively.

A similar fate was repeated during the Covid period in 2020 and 2021. As soon as the world economy started running out of steam and the global market was shut down, inflation and interest rates rose, and companies initiated their bankruptcy filings, especially the hotel and tourism industry, NEPSE broke records every day and reached a historical high, above 3000 points in august 2021.

In hindsight, one could argue that the security market in Nepal is not driven either by economic indicators or individual performances of the listed firms. Instead, it was/is driven by irrationality, asymmetric information, and the absence of alternative investment opportunities. It is also said that NEPSE is controlled by a handful of major players who influence the market through misinformation and their investment modus operandi. Particularly, they buy and sell their holding in bulk to motivate the market and other naive investors in their intended direction. Small and not-so-well-informed investors make decisions based on misleading information on social media such as Facebook, YouTube, and Clubhouse.

During lockdown, social media platforms such as Clubhouse began receiving significant attention, and this trend persisted into the post-Covid period. Self-proclaimed experts and economists, and in some cases, even higher-level authorities of listed companies, engage in discussions within these groups that mostly had gullible investors lacking access to accurate financial information about the companies they invest in. These naive investors anticipate rapid price increases and seek overnight capital gains, leading them to purchase stocks at peak prices with hopes of further appreciation. Data show that some companies performing well in the market exhibit price-earnings ratio(PE) as high as in the four-digit range. Thanks to such misleading information, companies that have been at a loss for years are trading above the Rs1000 mark.

There are only two explanations for such irrational investments. It is either an intentional move from major players to divert fragile investors, create demand and increase prices, or irrational investment behaviour of small investors with high return expectations. Further, recent developments in technologies such as online transactions, easiness in opening Demat and TMS accounts, and internet access have made it easier to increase market coverage, and gullible investors have started treading based on misinformation on social media platforms. If not, how did prices hit a record high when Covid pulled the rug from under the economy by turning the companies’ balance sheets and income statements red, heating inflation and interest rates, and driving the economy into negative growth?

Even in the current macroeconomic scenario, characterised by record-breaking remittances, decreasing interest rates, and high liquidity in the financial market, the firms’ performances aren’t satisfactory. It is just a matter of hours before any avid investor can uncover the trend of decreasing earnings per share and increasing PE ratios among most listed companies over the past years. No rational investor would take a long position when price-to-earnings ratios are excessively high and per-share earnings are declining—unless they are either speculating or have a strong understanding of price movement.

Therefore, the current fate of NEPSE is not bearish; it is simply correcting the market. There is no foundation to compare the current performance with and claim a bearish NEPSE. The problem is that we are comparing the current performance with the NEPSE index during the Covid period, which is irrational and statistically nonsensical. Unless the economy has a solid foundation and companies have good income statement returns, the asymmetric information-induced market doesn’t sustain. The same thing is happening in the capital market of Nepal. Investors have started realising their irrational investment decisions and decreasing investment returns. As a result, investors are afraid to make further investments, if anything, supplying shares to earn whatever they have in their portfolio.

Similarly, large investors and associations of listed companies still blame policymakers for hiding their weak financials. There are always policy issues when it comes to doing business in any economy, but short-term policies such as tweaking margin lending, allowing banking institutions to make direct involvement in shares, and decreasing interest rates and proportion on share purchase loans will only create short-term upheavals. For instance, the current bullish trend in world stock markets is not due to any such short-terms upheavals but due to the high performances of AI-based and tech firms in the world economy. Yet, what is important now is to control market misconduct and misinformation, which are not only detrimental to naive investors but also to the economy. Of course, some may gain in the present condition by investing in such a dramatic market, but this is solely because of the loss of fragile investors, not because of the concerned company´s performance. This is no less than winning money in gambling. After all, what is the point of having a security market that is no less than a gambling house?