Why NEPSE Fails to Reflect Nepal’s Economic Reality?

The Nepal Stock Exchange (NEPSE) has played a key role in linking individual savings to investment and enabling companies to raise funds through the issuance of shares. Stock prices have often served as indicators of investor confidence in companies, with the index level generally reflecting broader confidence in the economy—shaped by political stability, interest rates and growth prospects. In theory, a rising NEPSE index should be associated with greater wealth, higher consumption and investment and ultimately, stronger GDP growth. A vibrant stock market is also expected to attract foreign investors, bringing in capital and improving the balance of payments. Globally, stock markets are seen as key barometers of economic health.

Market capitalization at NEPSE reached 82% of the country's GDP worth Rs 6.107 trillion. Data show a strong positive correlation between GDP and major stock market indicators. Regression analyses suggest that market capitalization and the number of listed companies have significant positive effects on GDP, indicating that stock market variables are closely connected with overall economic performance.

A Small Market

Despite these figures, NEPSE remains a small and illiquid market prone to volatility, with only a few hundred listed companies. Trading volumes are low, and the market is driven largely by sentiment rather than fundamentals. There are few market makers and limited investor participation. As per the recent data, only about 6.75 million DEMAT accounts exist, covering less than a quarter of Nepal’s population.

Most investors engage in short-term speculation within a handful of sectors. Institutional and foreign investors are largely absent. Businesses continue to rely heavily on bank lending rather than raising equity through capital markets. As a result, while domestic credit from commercial banks has increased, the issuance of new equities remains negligible. Investors tend to view NEPSE as a secondary, speculative platform rather than a means for companies to raise capital. This disconnects the stock market from the GDP-driven investment cycle.

Turnover in NEPSE has remained low, with little evidence of linkage to real economic activity. Many major businesses, particularly in hydropower, manufacturing and hospitality, are still privately held and unlisted. Consequently, NEPSE captures only a small fraction of the country’s economic activity and fails to represent the broader economy.

Sectoral Mismatch

NEPSE also overlooks major components of Nepal’s economy, particularly agriculture, which contributes roughly 25% of GDP. Numerous manufacturing firms—producing goods like noodles, cement, liquor, tobacco and steel—are privately owned. Likewise, many service industries central to Nepal’s economy are unrepresented in the stock market.

Another reason for this disconnection is the dominance of the informal sector and the economy’s dependence on remittance inflows, which are not reflected in NEPSE. With only a handful of manufacturing firms, hotels and tourism companies listed, NEPSE’s sectoral coverage remains narrow. For example, while an increase in agricultural output or tourist arrivals may boost the economy, such developments have little visible impact on NEPSE.

The Trend

Over time, NEPSE’s movement has shown little alignment with the real economy. In 2018, for instance, the NEPSE index fell from 1,582.7 to 1,212.4 points—a 370-point drop—while GDP grew by 7.6%, according to the World Bank. Similarly, during the fiscal year when Bishnu Paudel became finance minister, the index rose by over 20% even as GDP growth stood at only 3.6%.

The biggest bull run in 2021 occurred when GDP growth was just 4.8%. Even during the COVID-19 pandemic, when the economy was contracting, the NEPSE index rose by 103 points when the base month of July was taken into consideration. These examples illustrate that price movements in NEPSE are driven primarily by liquidity, margin lending and investor sentiment rather than corporate fundamentals. For most participants, NEPSE functions as a short-term trading platform rather than a reflection of company performance.

In contrast, India’s stock market actively supports corporate growth, maintaining a stronger alignment between GDP and market performance. Its market is far more mature, broad and diversified, with total market capitalization exceeding 300% of GDP. Nepal’s challenge, therefore, lies not in the potential of its stock market but in its limited scope, lack of depth, and weak linkage with the real economy.

Equity Valuation

Looking more closely, Nepal’s equity market is not broadly undervalued. In fact, the financial sector, particularly banks and insurance companies, appears fairly valued. However, small-cap stocks, microfinance institutions and hydropower companies are often highly speculative and overvalued.

Globally, equities are trading at elevated levels, with rising price-to-earnings (P/E) ratios reflecting optimism and leaving little room for error. Investors typically assess these ratios against historical averages or peer markets. A P/E ratio above 20–25 is considered expensive in the international markets, though not necessarily indicative of a bubble. In Nepal, however, P/E ratios for many stocks exceed this range, suggesting significant overvaluation across sectors like hydropower and manufacturing, among others.

In India, high valuations are supported by strong fundamentals and liquidity, where investors pay a premium for growth and market depth. Nepal’s market, by contrast, is small and illiquid, and the index can swing sharply with the movement of a single stock. Low float, speculative trading, limited earnings data and a narrow investor base all contribute to inflated valuations. While this reflects market sentiment and inefficiency, it does not correspond to real economic conditions. Since overvalued stocks cannot represent a booming economy. a rising NEPSE index does not necessarily mirror the country’s economic performance.

Lack of Standard Trading Mechanism

The stock market also lacks basic trading instruments and mechanisms. Short selling and intraday trading are prohibited, and derivative or hedging tools are absent. Investors can only buy and hold stocks, leaving the market prone to speculative rallies and inflated prices. Mutual fund participation also remains minimal.

Additionally, practices such as issuing bonus and rights shares often inflate share supply without corresponding earnings growth. Distributing stock dividends instead of reinvesting profits may lead to wealth creation for shareholders but dilutes earnings per share. As a result, the market expands in paper value rather than in real fundamentals.

Absence of Global Capital NEPSE is largely detached from global capital flows. All trading activity is driven by domestic investors, with foreign institutional participation and benchmarking virtually absent. Although rules and regulations are gradually being simplified, the isolation from international investment further weakens NEPSE's linkage with the country's economic fundamentals.

Currently, the market operates under high liquidity, low interest rates and a supportive monetary policy. Despite this, trading has remained shallow, dominated by a few players who exert disproportionate influence on price movements. A small number of companies can drive the entire index, reflecting structural fragility and occasional price manipulation. 

Although hundreds of firms are listed, only a small fraction are actively traded, resulting in limited market breadth and high volatility.

Moreover, NEPSE is highly sensitive to policy changes—whether it is the loan-to-value (LTV) caps on margin lending, interest rate adjustments by the central bank, or taxation rules on capital gains and dividends. Political instability adds another layer of volatility, further distancing the market from real economic trends.

Although statistical models may show some correlation between NEPSE and GDP, this relationship is weak in practical terms. NEPSE certainly is not a true barometer of the country's economy because it reflects sentiment and liquidity conditions rather than the true state of the economy. Nepal’s GDP has nearly quadrupled since 2008—from $12.55 billion to USD 46.08 billion—while the NEPSE index has not even tripled in the same period (rising from 1,175 to around 3,000).

Since NEPSE is dominated by the financial sector, it represents only a narrow slice of the economy rather than its full diversity. While there may appear to be statistical links, the stock market acts as a distorted mirror just because a few sectors dominate both GDP and NEPSE.

Globally, stock market indices are seen as key indicators of a country’s economic landscape. In Nepal, however, a higher NEPSE index has not translated into stronger job creation, higher production, improved agriculture, a better balance of payments, or broader economic progress. This clearly shows that NEPSE, in its current form, is not a true economic barometer of Nepal’s economy

This opinion article was originally published in November 2025 issue of New Business Age magazine.