Despite economy badly suffering, stock market sees a record highEasy access to bank loans against shares, lack of opportunities elsewhere, and largely consistent bank profits fuels bull run but regulators urge investors caution.
At a time when the business community is crying for help from the government citing the catastrophic impact of coronavirus on their businesses, the pandemic appears to have little to no impact on the country’s share market.
On Tuesday, the Nepse index reached a record high of 2000.04 points as the market went up consistently for the last seven days growing by 219.97 points between November 23 and December 1. On Sunday alone there was a record turnover of Rs9.22 billion.
This bullish unnatural run of the stock market even prompted the Securities Board of Nepal, the regulator of the country’s stock market, as well as the Nepal Stock Exchange, the secondary market, to warn investors about the risks if they fail to make investment decisions wisely.
“It will be beneficial for the investors to make investment decisions by analysing the overall financial and economic indicators,” the securities board said in a statement on Monday.
Despite the Board urging investors not to run after rumours but to be mindful of the international and domestic economic situations, financial situation of the listed companies, corporate governance and their risk absorbing capacities before taking investment decisions, investors do not seem to be concerned.
The country’s economy is expected to grow by a mere 0.6 percent in the current fiscal year, according to the World Bank. In the last fiscal year 2019-20, economic growth was projected at 2.27 percent by the Central Bureau of Statistics as a result of the impact of the Covid-19 pandemic.
Ironically, the poor economy has spurred the growth in the stock market.
According to investors and officials, coronavirus has emerged as an opportunity rather than a threat for stock investors as it has helped them get loans from banks and financial institutions easily since investment opportunities for them in other sectors are limited.
They say that the biggest factor contributing to a bullish run is the availability of loans from banks and financial institutions at cheaper interest rates.
“Loans against the collateral of shares are available faster, easily and at cheaper interest rates than ever before,” said Rajan Lamsal, secretary of Nepal Investors’ Forum, a grouping of stock investors. “We can get loans in abundance at an interest rate as low as 7.5 percent. Even after paying the interest, there is the scope for getting a return of 5-7 percent from the dividends of the companies.”
Nepal Rastra Bank data corroborates Lamsal’s view about credit facility from banks against the collateral of shares being utilised during the first quarter of the current fiscal year.
Banks and financial institutions lent Rs59.4 billion during the first quarter (between mid-July and mid-October) of the current fiscal year against Rs45.32 billion during the same period in the last fiscal year, according to the central bank’s data.
This, in turn, has led speculators to the stock market.
“Bullish run in the market also brought confidence among the investors,” said Lamsal. “Better than expected financial indicators of most of the listed companies even during the coronavirus pandemic also boosted the morale of many investors.”
Gunakar Bhatta, spokesperson for the central bank, also considers excess liquidity in the banking system due to the low demand for loans from other sectors as the factor that helped the stock market grow.
“Many people are in leisure due to the lack of economic activities like in the normal times. Therefore, they are now investing in the stock market as the loans are easily available,” he told the Post.
Another factor is that banks have just announced their first quarter profits and bank stocks, which are generally the most traded shares in Nepal’s stock market.
Profit after tax of commercial banks may have gone down during the first quarter of the current fiscal year but this has not deterred the investors of the secondary market as they say its first quarter profits are not as bad as expected.
Commercial banks made a profit of Rs14.60 billion during the first quarter of this fiscal year compared to Rs15.62 billion during the same period last fiscal, according to their quarterly financial reports.
The other reason, according to the investors and analysts, is that this is also the time when the listed companies announce dividends and many have purchased shares for the lure of dividends.
“But most of the investors currently are buying the stocks in the secondary market to make money through share trading instead of getting dividends,” said Chandra Singh Saud, chief executive officer of Nepal Stock Exchange. “When the market takes a bullish run, such a tendency appears among the investors.”
Investing in stock has been more lucrative than depositing money in the banks and financial institutions whose interest rate for deposits has shrunk sharply in the recent months due to high liquidity in the banking system, according to Lamsal.
Another reason is that in recent months, many companies have not issued initial public offerings and further public offerings, which are the preferred options for stock investors because they can get shares at a cheaper rate.
“Therefore, usual share investors have been focussed on the secondary market,” said Saud.
On the other hand, the central bank has also adopted capital market friendly policy in its latest monetary policy for 2020-21 although it usually tends to discourage lending by the banks and financial institutions for the stock market, terming the sector more risky.
For example, the monetary policy allowed the banks and financial institutions to offer loans to share investors up to 70 percent of the value of shares put as collateral, up from 65 percent earlier.
For the purpose of valuation, the banks and financial institutions can maintain share value based on the average closing price of shares for the last 120 days as per the monetary policy. Earlier, they had to take the value of the last 180 days.
Either average closing price of 120 days or prevailing market price, whichever is lower, should be considered as the value of shares, the monetary policy says.
“Such ease in lending for purchasing shares is also a factor helping the stock market to grow, said Saud.
The growing trend of the online trading of stocks also helped the secondary market to grow, according to investors and analysts.
According to the Nepal Stock Exchange, ever since it introduced a fully automated online trading system in November, 2018, key indicators of the stock market have improved gradually as investors do not have to visit stockbrokers’ offices anymore.
As of Sunday, 189,000 investors have registered for online trading. On Sunday, 88.55 percent of the total trading took place online.
“The Covid-19 pandemic forced us to go for online trading. It also enabled many investors across the country and Nepalis abroad to participate in trading, which contributed to the growth of the secondary market,” said Saud.
According to Lamsal, over 100,000 investors purchase and sell stocks online regularly with investors numbering between 45,000 and 50,000 engaged in trading every day.
However, despite the current bullish run in the stock market, experts question whether it is sustainable.
“Bullish runs without the backing of the economic fundamentals [good economic and financial indicators] cannot be sustainable,” said Bhatta of the central bank. “At present the economy is heading towards one direction while the share market is heading towards the opposite direction.”