Invest cautiously
Stock market is often a mirror of any economy. However, Nepal’s stock market has long been behaving in an irrational fashion, giving a confusing signal about our economy. Unlike in other countries, our stock market often appears isolated from real economy. No solid reason is needed for investors to behave exuberantly, driving stocks to a peak while an unfounded rumor is enough to trigger panic sell-off of stocks. The Nepse benchmark index plunged over 60 points in the first two trading days last week before recovering few points in the last two days. This has mainly to do with the herd mentality among the investors who put their hard-earned saving or borrowed money into stocks where others are investing or are advised to do rather than understanding the fundamentals of the company of whose stocks they want to pick. After reaching an all-time-high after Nepal Rastra Bank (NRB) raised paid-up capital for bank and financial institutions (BFIs) by multi-fold and on the account of ultra-low interest rates, stocks were on a downward trend from last year when the interest rates started to climb up due to shortage of lendable fund in the banking system.
Many investors have now found the newly appointed Minister for Finance, Yubaraj Khatiwada, as a culprit for the massive correction of stocks. Though the technocrat finance minister is in favor of the financial resources to be channelized into the ‘productive sector’ that helps capital formation, creates jobs and contributes economic growth as reinforced in his recent interview, stocks investors interpreted it as an intention of the government to tighten the stock market.
The stocks took a slump in the first two trading days after his interview previous week, but quickly recovered in the last two remaining trading days. The volatility of stocks, as observed this week, on the accounts of unfounded rumors shows that there is a long way to go for Nepal’s stock market to be mature. While stock market provides an opportunity for investors to sell or buy shares of a listed company thereby providing a liquidity to them, it should not be a place where a handful of investors manipulate share prices and benefit at the expense of retail and small investors. The ‘pump and dump’ practice whereby manipulators encourage retailers to buy shares to inflate price and offload their holding when the price is higher should be checked and curbed by Nepal Stock Exchange and Securities Board of Nepal (Sebon). To stabilize the volatility in the market, the government, mainly Sebon, should create an environment for more institutional investors, market makers and mutual funds to enter the market so that there is a little room for some big players to manipulate the market.
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While there are some modernization initiatives and reforms, notably enforcement of the paper-less trading system in recent months, the fully-automated online trading is what Nepal’s stock market immediately needs. The government should also make more efforts in encouraging other public companies, particularly from manufacturing and real sectors, to float their shares to the public and list them in the market for trading. This will help investors diversify their portfolio while also reducing the volatility from any regulation taken by the NRB for BFIs which dominate the stock market. Investors, particularly those who are pouring their hard-earned saving into stocks, should be cautious while trading in the market fraught with risks.
