Investors welcomed the Nepalese New Year on a strong note as the Nepal Stock Exchange (NEPSE) benchmark index went up by 17.15 points on the first trading day of the year to close at all-time high of 1405.78 points. Since September 2015 the market has risen by almost 18% gaining over 214 points with an average daily transaction of NPR 450 to 500 million (USD1 4.25 to 4.72 million). The surge seen in the market in the recent months is unprecedented amidst sluggish GDP growth rate repelled by devastating earthquake and economic blockade. The market has rallied in the short term due to four basic reasons:
Ease of trading due to dematerialized securities: Full-fledged trading of dematerialized (DMAT) securities of listed companies in the stock market has eased the trading process and thus increased market liquidity. Earlier investors had to wait up to two weeks for share ownership to be transferred under physical certificated-based trading system. Under the new system, the shares ownership is transferred within T+3 days (trading day plus three business days).
Excess bank liquidity and easy bank financing: Banks are back in the business of funding share purchases (margin loan) as higher liquidity in the market is leaving them with no option but to explore everything they can fund.
Additional capital requirement: Investors are excited about the prospect of getting additional shares as Banks and Financial Institutions (BFIs) are required to meet the new capital requirement stipulated by the central bank by the end of FY 2016/17. Likewise, investors were also attracted towards Insurance companies and Micro Finance companies due to prospect of right and bonus share upon anticipation of increment of the capital base. Currently, 84% of the listed companies in the index are from the financial sector.
Positive mind-set of investors: Investors’ confidence and risk appetite is high due to the promulgation of much awaited constitution. Investors are convinced that the country will now have a stable political environment and focus towards economic growth.
HIGH LEVEL OF PARTICIPATION IN THE PRIMARY MARKET
The spillover effect could also be seen in the primary market. Out of the IPOs and FPOs issued to general public worth NPR 8 billion (USD 75.5 million) in the last six months, the total application received was NPR 120 billion (USD 1.13 billion), which is approximately 6% of the country’s GDP. On an average, the public issue is oversubscribed by 15 times however on individual basis the oversubscription rate has also exceeded by 200 times (IPO of Mero Micro Finance and Nyagdi Group Power). On the collection size, the FPO of NIBL recorded all time high collection of NPR 48 billion (USD 0.45 billion) on issue of NPR 5.45 billion (USD 51.42 million).
MARKET DEEMED HIGHLY FRAGILE
The NEPSE index is going against the economic indicators. The investors are more concerned about parking their fund in the market rather than high Price Earning (PE) ratios of the listed securities. Moreover, the market is dominated by small individual investors who are more vulnerable to market upswings and are less resistant than institutional investors. Even though there are some mutual funds in the market however they are in a nascent stage and their presence is least in the market.
STOCK MARKET BUBBLE LIKELY TO BURST
Since the stock market is clearly in the bubble territory right now, and like all bubbles in history, it will eventually burst. It is a natural phenomenon of any stock market cycle to go in the correction mode after each of the bull markets. NEPSE index has seen similar correction after the surge in the FY 1996/97 and FY 2007/2008. In FY 2008/09, NEPSE index declined by more than 20% y-o-y, after showcasing increment of 40% in the previous year.
LONG TERM REFORMS NEEDED
To establish the stock market as a credible place to put one’s savings and not a substitute for the gambling den, the following developments need to happen;
A new private sector laid exchange should be allowed to enter which can expect to further develop the market in terms of technology, liquidity and inclusion.
Likewise, to ensure the financial statements of listed companies are not manipulated to deceive general investors, the process of implementation of International Financial Reporting Standard (IFRS) should be expedited.
Lastly, strong factual credit ratings of listed securities should be in place and investors should develop the habit considering the credit ratings as an investment analysis tool instead of taking this as only another regulatory requirement.
[1] Conversion rate of NPR 106 to a dollar
