In the short run, the stock market behaves irrationally. When we observe the market behaviour for a short period like a day or two, or a week or even a month, we might not see any rationality in its movement. This has led to many economists and the regulating authorities comment that Nepal Stock Exchange (Nepse) index does not follow the fundamentals. They overlook the long term behaviour. While observing the Nepse index and Nepalis economic data, the stock market synchronizes with fundamentals. The amount of rationality may differ from the developed market to the underdeveloped market like Nepal, but the trend of rationality has to be the same. The long term behaviour of domestic stock market has coincided with the economic fundamentals.
The Nepse index, at the end of last fiscal year, ended higher compared to a
fiscal year ago when it closed at 362 points, which was the lowest closing in the fiscal year after 2007-08. Why did Nepse take a
U-turn in the last fiscal year? Is it supported by any
fundamentals? Going through the fundamentals, some of the factors strongly support it to take a U-turn.
Principally, the economic growth and stock market should have a positive relation. The Nepse followed the principle. Securities Research Center and Services (SRCS) research data revealed that a correlation between the Nepse index and Gross Domestic Product (GDP) over ten years is 0.61, indicating that Nepse has been moving along with the movement of the economy.
The last fiscal year’s U-turn of the Nepse was the result of a U-turn in the economic growth rate. The economic growth of 2007-08 stood at 5.8 per cent but it dropped to 3.5 per cent in year 2010-11. However, in the last fiscal year 2011-12 it bounced back to 4.56 per cent. And the Nepse followed it to take a U-turn to 389 points from 362 points in 2010-11.The second fundamental that boosted the Nepse in the last fiscal year is the interest rate. Principally, the interest rate and the stock market should have a negative relation. The Nepse also followed this universal principle. The annual average discount rate of the Treasury Bill (T-Bill) picked up to 7.41 per cent in the fiscal year 2010-11, whereas it was 2.42 per cent in the fiscal year 2006-07. At the same time, the Nepse also fell from 963 points of the fiscal year 2006-07 to 362 points in 2010-11. Going through the last fiscal year’s data, the annual average T-Bill rate fell below 2 per cent from 7.41 per cent a fiscal year ago. Due to the fall in the T-Bill interest rate, the Nepse went up to 389 points in 2011-12 from 362 points in 2010-11.
Similarly, the Nepal Rastra Bank’s (NRB’s) current economic indicators are supportive of the stock market growth too. The liquidity has increased. The balance of payment has recorded its highest at Rs 113.22 billion. The foreign currency reserve has increased by 56 per cent the last fiscal year as compared to the previous one. However, the stock market is not moving at the same speed. Some of the analysts are projecting that the Nepse would reach 500 points soon. Will the market move forward as predicted? Is there any force that will push the market up?
Basically, four powers play important roles in the stock market movement. They are economic power, industrial power, companies’ power and investors’ psychological power.
When all the four remain strong, the stock market shoots up to what is called bullish trend. When they remain weak, the market turns bearish.
Lately, economic power is slowly weakening because of the delayed budget and low paddy production projection due to erratic rainfall and late fertilizer distribution. Similarly, the key player of the Nepse’s industrial power that is the banking sector has been facing credit crunch in absence of borrowers and the last year’s real estate lending is still haunting it increasing their Non-Performing Loans and hurting the profits growth, which is one of the key reasons for pushing the prices of the shares.
The listed companies have also not been able to increase their profits significantly that will have negative impact on investors’ psychology blocking the speed of the recovery of the Nepse any time soon. The investors have been expecting good return but the annual report of the banking sector has been discouraging and the returns they are announcing will further pull the market down as the investors would not be satisfied with the dividends.
The prolonged political uncertainty will also not help boost the investors’ confidence on the stock market and the market
will hover around the current level of 400 points, as there is no significant strength of any of the market forces and the environment to give it a boost.
The Monetary Policy brought by the central bank for the current fiscal year is also not supportive to the stock market leading to the not-so-much encouragement in the investors. The investors have been struck by the Nepal Rastra Bank sticking to its same stance without bringing in anything that could boost confidence in the private sector players.
Bhattarai is chairman of Securities Research Center and Services, and lecturer at Shanker Dev Campus.