The Nepal Stock Exchange Index (NEPSE) crossed the 500 mark last week, a milestone in the history of Nepali securities trading. Such are the psychological barriers that markets create and conquer. The Index has been developed on the basis of the total market capitalisation of securities listed at the Stock Exchange, taking as its base 100 in February 1994. Market capitalisation indicates the total value of the shares listed at the market price. The current capitalisation is Rs 62 billion, which represents close to 17 percent of the GDP. The trading volume, however, at just over Rs 10 million a day is an insignificant portion of the outstanding securities.
The Nepali market is yet to be understood and sways more to emotion than any concrete reasons. The economy is not climbing, and investments are not increasing but it is interesting to note that share prices are soaring. The last couple of weeks saw a bull run and people have gone berserk trying to reap maximum profits.
Though the index has jumped from less than 200 a year ago to its current high level, the surge is more in bank shares alone. What happens in the market here has nothing to do with the fundamentals of share trade. As a broker told this Beed, if you want to play in this market you should forget everything you know about profit and loss, accounting and balance sheets. Bank shares have increased due to speculation by companies going in for stock splits to meet the Rastra Bank requirement of Rs 500 million capital, and not because of their bottom line.
The previous bull run also came about in winter, in 1994, and the timing this year is no coincidence. Companies usually hold their annual general meetings six months after the closing of accounts in mid-July. The market is tense and expectant, especially about bonus shares. We Nepalis love to gamble and our fondness for speculation and rumour-mongering carries over into the share trade. Trading in Nepal is like playing lotto. Keep an eye on the market and prices this coming March to see what happens when there are no speculations to chase wildly.
There are few institutional investors in the market and the investors as a group are far from knowledgeable. The money chasing the handful of scripts in the market is what would have gone into fixed deposits or real estate in more favourable circumstances. Interest rates have nose-dived and real estate prices are still in a slump-there are simply no other avenues for investment in the country.
The share market needs to grow organically. These sporadic sharp increases and declines do not bode well. The securities market, both long-term debt instruments and shares, should be developed for sustainable growth rather than wait for it to go through periodic swings. Institutional investors, especially those from overseas, have to find the prospect attractive as well as trustworthy. Fundamental changes need to be made about, like the use of internationally accepted disclosure norms. The institutional framework to regulate the market must improve. Finally, we have to move towards paperless trading.
Nepal's share market can offer many possibilities and opportunities, but it needs to be developed in an organised manner. The way we are going now, there may be a couple of wealthy people created each year. But that will be at the cost of thousands who lose. The market has to graduate from being a variation on a lottery to a strong arm of the economy.
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