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Cold Facts About Nepal's Hot Stock Market

September 09, 2015

The Nepse, Nepal's benchmark stock index, on Aug. 20 rose above the 1,200-point level for the first time in history. Less than three months earlier, the market was at 837 points, a new low for the year due to political uncertainty and the aftermath of a devastating earthquake that leveled parts of Kathmandu.

 

While the Nepse has slipped from its record high amid the rout in global markets, the index is still up about 20% over the past month. Given the April quake, political protests and strikes that have shut down parts of the country in recent weeks, and the slump in world markets, the Nepse's surge comes as a big surprise.

 

The Nepalese stock market launched in its current form 22 years ago with a few listings. Soon after, the government gave the fledgling market a boost by requiring financial institutions to offer shares to the public. These initial public offerings were a hit as people sought the potential of gains from the institutions' trading debuts, or to use the shares as collateral for business loans. Out of a total market capitalization of $12 billion, only $4 billion is freely floating; financial shares represent nearly 80% of that portion of the market.

 

With foreign investors barred from trading, Nepal's market is well-insulated from the vagaries of global shifts. Instead, the market fluctuates based on rumors and speculation about pending changes in government policy, driven largely by retail investors.

 

The recent market uptrend follows the July 23 announcement by Nepal's central bank of new, higher capital requirements for the country's financial institutions. The minimum level of shareholder-funded capital for commercial banks, for example, is to be quadrupled, with the banks given two years to make up the difference. Though the prospects of share dilution and other costs might have been expected to hurt the stock prices of financial institutions, investors excited about the prospect of new issues have instead pushed up shares.

 

On Aug. 17, the Nepal Stock Exchange made digital trading in the shares of all financial institutions mandatory. As share settlement could previously take close to two weeks, the transition to paperless trading promises to make the market far more liquid. This, too, has boosted financial shares.

 

Some market observers believe that investors with inside information about the paperless trading rule used the recent surge to take profits. This cannot be ruled out, as Nepal has no system to detect or penalize insider trading.

 

The way ahead

 

Nepal is rebuilding from the earthquake, which took nearly 10,000 lives, rendered hundreds of thousands homeless and destroyed or damaged close to a million homes. Out of the $7 billion needed to address the damage, some $3 billion has been pledged by international donors.

 

Political stability has been a major problem ever since multiparty democratic government was restored in 1990, especially during the 10-year Maoist insurgency that ended in 2006. The country has counted 22 prime ministers over the past 25 years.