Sustaining the Bull Run

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Sustaining the Bull Run

Nepal's stock market has been on a bull run since January last year. Nepal Stock Exchange (Nepse) index, which stood at 1182.31 points on January 5, 2020, surpassed the previous record of 1881.45 points on November 26, 2020 and has since been creating new records almost every other day. With this, the total value of shares listed on Nepse, which is referred to as market capitalisation, surged from Rs 1.5 trillion on January 5, 2020 to Rs 3.3 trillion on January 24, 2021, which as a percentage is over 85 percent of the gross domestic product.

It's not only Nepal's stock market which is witnessing this trend. Stock markets across the world have been on a bull run as the Covid-19 pandemic has hit almost every sector propelling those looking for investment opportunities to funnel money into stocks.

In Nepal, banks are currently flush with cash as remittance inflow has remained steady even in these pandemic times. Since there is very little demand for loans from the productive sector due to cut backs in consumption, banks are offering credit at cheaper rates, further fuelling the bull run. Average lending rates of commercial banks in Nepal stood at 9.37 percent in December as against 11.93 in the same period a year ago. Banks are allowed to disburse up to 40 percent of their core capital as loans under the margin lending facility of the central bank.

So far, the central bank's policy has also remained accommodative, which has helped the market to scale new heights. This bull run is expected to continue until the central bank tightens the screw on banks that are providing cheap money to stock investors. Once credit becomes expensive, price corrections will take place. These corrections, however, should not cause stock prices to take a big hit, triggering a stock market crash like the one of June 2011 when the index plunged to a record-low of 292 points. This calls for diversification in the stock trading options to keep the market liquid.

Recently, the operator of the stock exchange told brokers to transfer stocks to buyers and settle the payment of sellers within two working days of executing transactions. Earlier, this process used to take three days. This has paved the way for stock investors to accelerate the pace of reinvesting the money back into the stock market. Lately, talks have also centred around introducing intra-day trading on the stock market, which will allow investors to sell stocks they purchased on the same day.

Also, stock traders are requesting that the option of short selling be introduced, under which investors borrow shares from others, sell them anticipating price drops, then purchase the same shares after their prices have fallen which they then give back to the lender. The operator of the stock market should introduce innovative trading practices like these to keep the stock market liquid and provide investment options to stock investors. The Securities Board of Nepal, the securities market regulator, should also expedite the process of extending approval to new services that Nepse intends to introduce.

The stock market is an integral part of the capital market, where companies raise funds from the public with the intention of providing returns. But for a long time Nepal's stock market has been dominated by financial institutions, including banks and insurance companies, as regulatory provisions made it mandatory for them to allocate certain portions of their shares to the public. Lately, there has been a shift in this composition, as the share of financial institutions on the stock market has dropped from 80.5 percent in 2018 to 71 percent in 2020.

This is because private companies operating in other sectors have also shown interest in listing their shares on the stock market, as they have realised that the capital market is the place where funds can be raised efficiently. Recently, Chandragiri Hills, a company engaged in the tourism business, floated its shares on the primary market and a few years ago Shivam Cement also listed its shares on the stock exchange. There are now talks of Ncell joining the market as well. The government should encourage more private companies to list their stocks on the exchange as it would enhance transparency of the private sector.

Madan Lamsal
[email protected]

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