Making sense of stock markets in Nepal

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So it all started with the victory of a democratic force in the Constituent Assembly (CA) II of Nepal on the 19th of November, 2013. In a month, the NEPal Stock Exchange (NEPSE) index surged from just over 600 as on November 17, 2013 to over 800 as of December 19, 2013. In between, the capital market saw record high per-day transactions and growth. Then it slid to around 750. So what do we make of all these fluctuating numbers?

People have started feeling that finally there will be a stable political milieu and the businessmen have better days ahead. Consequently, investors seem to have seen some light at the end of the tunnel. The flurry of investors looking to put in their hard-earned money in the stocks of banks and financial institutions (BFIs), hotels, hydroelectric projects other business houses hints thus.

But then what about the fluctuation? If such, as aforementioned, is the case, shouldn’t the stocks only be shooting upwards? Well, there is something good about these fluctuations too. These sudden downward movements are technically known as ‘corrections.’ What these mean is that the investors are weary of the situation and concerned about where they are putting their money. Had the investors been ignorantly pouring their money into stocks, or just ‘following the herd’, as experts like to put it, then the index would have just shot up, never looking downwards (for sometime, just to come crashing down after a while). But these corrections are signs of investors’ maturity in terms of investment decision they make.

So why stock markets at all?

One, stock markets are very important institutions of a market economy as they channelize funds from surplus units (lenders) to the deficit units (borrowers). When a party buys a share of any public company that party is actually availing funds to the company, which it will use to carry out economic activities. In doing so a stock market provides an avenue for investment and consequently boosts the economy -through increased investment and entrepreneurship. This exchange between the two parties creates jobs in the market in the form of employees that the borrower needs in order to carry out his activities and consequently, creation of varied goods and services also takes place in the market.

Two, stock market allows the investors to buy and sell their shareholding at any time in the future. Put succinctly, there is no barrier to exit. This is one of the biggest guarantees that any prospective investor seeks and stock markets provide just that.

Three, unlike a single-owner enterprise, the new wealth that is generated in a public company gets spread to a wider public, in the form of capital gains and dividends. Therefore, stock market can also play an important role in creating prosperity across an economy.

Given these prospects, the capital market in Nepal is still not a mature market in itself. It still takes months before share transfer and settlements are concluded. This violates the fundamental of stocks as being securities that can be bought or sold any time as per the transacting party’s discretion. The stock market is heavily dominated by banks and financial institutions and hydropower projects, meaning that a large portion of the economy still remains outside the realm of it. Human resource deficiency, issues of transparency and operational efficiency are also expressed as being some crippling agents to the soundness of the stock market, as per the experts.

On a concluding note, I would have to say that the avenues the stock market provides for fostering productive activities should be tapped. If the brokers and other concerned stakeholders push for automation of the system and the regulatory body plays the role of a facilitator in dealing with the crippling agents as aforementioned, we can definitely make way for a more mature stock market that can pave the way for economic growth.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.