Fundamental principles of economics do not apply in Nepali capital market. Is there different dynamics playing out behind the scene? Perhaps
Capital market is one of the foundations of the country’s economy. It diverts individual savings into productive areas and sound capital market indicates a healthy growth. Growth of capital market is the fundamental of free market economy. Better the capital market, higher the rate of return in investment and the propensity of sustainable growth. But overall picture of capital market in Nepal looks rickety with lots of assumptions about its contraction and expansion.
A significant decline in Nepal Stock Exchange (NEPSE) index this week has triggered skepticism. NEPSE witnessed a harrowing fall immediately after announcement of UML-Maoist merger in October 2017. Following this, NEPSE index crashed continually until early January this year. The bearish trend was so harsh that it put all investors in gloom. Nobody was sure about the state of economy. All hypothesis and speculations about the market turned baseless as billions of rupees evaporated for no good reason. Continuous fall shocked the investors.
Many investors tend to buy shares when the market goes bearish because the price of share in the market falls off. And it is considered a good time for potential investors to make investment. However, the situation until late February was so nasty that the market continued to decline with some exception. This trend not only discouraged potential investors, but also raised a big question mark on market regulator. The decline kept all possible investors at bay and forced the regulatory body to impose circuit breaker to stop further slide in early March. Circuit breaker is the last option to stop further decline in stock market.
Speculations and dynamics
Investors had hoped that there would be some improvement with formation of left unity government because common election manifesto of CPN-UML and Maoist Center had promised to promote market economy to gear up economic growth. But one remark by Finance Minister Yubaraj Khatiwada’s that suggested ‘not to encourage banking institutions’ to lend money for investment in stock market dampened these hopes. Following this, NEPSE index declined to the rock bottom forcing the regulatory body to impose circuit breaker. Some degree of improvement has been noticed after the government brought forth some reform programs in the White Paper.
The announcement of left alliance could have been a mere coincidence in triggering a bearish trend in October last year. The size of Nepali capital market is gradually increasing along with the size of the economy, but the volume of transactions is very small compared to other South Asian countries.
The capital market often reflects the overall economic paraphernalia determined by multiple factors of micro and macro economy. Apart from economic indicators, political and social factors equally impact the market because changes in the country’s politics affect a number of economic activities such as change in the interest rate, rate of return on investment, balance of payment etc. Even minor political incidents can influence the mass psychology (of investors).
Terrorist attack in which dozens of people were killed in London in 2005 had a severe impact on the stock exchange which took almost a month to regain the confidence of investors. Thus multiplier effect of political or social incidents reflects in the share market as well.
Ironically, fundamental principles of economics do not apply in Nepali capital market. Is there different dynamics playing behind the scene? Perhaps. Our stock market is so small that an individual actor can manipulate it for some time. Investors and traders are yet to be proficient in terms of making investment in stock market. Most investments are made without proper market analysis.
Besides, investors hardly analyze the trend before investing in the areas where there is a possibility of quick return. On the other hand, the concerned authorities that govern share market do not take any initiative in educating investors. And then there is a lack of monitoring mechanism. All this has given way for a handful people in decision-making body to reap undue benefits.
According to the statistics of Nepal Rastra Bank (NRB), our economy is not in good shape as the volume of trade deficit has been significantly rising since July this year. The trade deficit has increased and the remittance flow has declined remarkably. This has had effect in capital market as well.
One can never expect a rise in the share trade as long as the macroeconomic indicators are unfavorable. The existing bearish trend in the capital market can be largely blamed for negative performance of economy owing to lack of clear government policy for capital market. Contradictions between the promises made in election manifesto and the government’s White Paper could be one of the reasons behind volatility of stock market.
Market forces should not always be driven by rumor. Investors make some speculations before making investment. Lots of assumptions have been made about downfall of NEPSE index. But most of them are baseless, which has affected trading of shares.
The left unity government has not yet brought any specific policy to regulate the capital market. It professes to follow the economic model of socialism, but it is still not clear what approach and policy it would take on liberalization and privatization. The stock market cannot flourish merely in assumptions. It needs policy backup and institutional support. The concerned authorities to regulate the stock market seem least bothered about the current situation. Thus the government should ginger up confidence of investors and make the market secured. A clear cut policy on stock market is a must. Otherwise NEPSE will keep sliding.