Nepal’s stock market and economic growth: Some Reflections
Published on: April 14, 2021
“Price is what you pay. Brother, you get it. ”- Warren Buffett
By Shankar Man Singh
In principle, the stock market promotes economic growth by increasing investment levels and productivity. They increase the savings rate and even increase the efficient allocation of savings. As a result, more savings go to the corporate sector and economic growth is expected. As a result, more savings go to the corporate sector and economic growth is expected. There is a positive correlation between stock market growth and economic growth, but even in the meantime, open questions sometimes arise.
Just to recapitulate, stock markets in Asian, African and European countries were at risk as a result of the 2008 global financial crisis, and the negative impact of economic growth was worrying.
Why is the stock market rising despite Covid-19?
Why are the stock market prices rising even though Nepal’s real economy is weak? One factor is almost clear: the stock market has a relatively large impact on small businesses and low-income service businesses. For example, as the stock market looks ahead, current stock prices may be boosted by optimism about the successful use, arrival, and fundamentally improved testing and treatment options for effective Covid-19 vaccines.
According to some investors, this is a good sign if investors are consciously reducing their attachment to politics. The stock market is affected not only by politics but also by other policy decisions around the world. However, as the instability of political instability is recurring in Nepal, even if it has an immediate impact on the stock market, it is also a message for the political parties to take the growing stock market as a message given to politicians by investors.
The situation between politics and the economy in Nepal is not so comfortable, but in recent months, the enthusiasm of the stock market seems to be creating such a situation. Similarly, investment in the share market has also increased in recent times due to lack of demand from the private sector in banks and financial institutions and accumulation of investable funds and cheaper interest rates. As the share market decreases when the interest rate rises and the share market rises when the interest rate decreases, the relationship between the interest rate and the share market is always opposite.
It is not clear that markets are right in expecting a never-ending continuation of low-interest rates. However, long-term adverse supply effects, especially from “de-globalization”, could lead to long-term structural changes once global demand improves.
The ratio of GDP to market capitalization – the best way to develop the stock market compared to changes in the stock price index – was that some emerging economies fell more than 40% in 2008. But does the rise or fall of the stock market make a difference to economic growth? Ordinary people who don’t know about the stock market often consider the stock market as a casino. However, due to adequate policies and reforms, the stock market can play an important role in the economic growth of these countries. It occupies such an influential place in the economic theory of capital production and distribution that it is natural that it should have at least an equally important place in the theory and practice of economic development. From a historical or analytical or policy point of view, it is a process of capital accumulation.
In general, it has been pointed out that with high positive and significant cooperation, economic growth and capital accumulation and addition to the capital market can facilitate rapid economic growth even in conditions that can be described as lack of capital.
The relationship between the above-mentioned economic growth process and the process of capital accumulation led to earlier theories of economic development, and even the work of modern economists is expected to be limited by whether capital is sufficient. A higher rate of capital formation usually leads to a faster increase in production and income, but additional capital formation in itself does not provide the same momentum in the growth of production. It also has a large impact on the way it is used in the capital market.
The capital market is important for all financial instruments, be it for the short or long term or commercial, industrial, and government financial instruments. Capital market refers to all institutions and medium and long term fundraising mechanisms, through various instruments available in stocks, debentures, bonds, etc.
Both the private sector and the public sector corporates raise thousands of crores of rupees in these markets. The key components of the capital market are stock exchanges, banks, investment funds and companies, specialized financial institutions or development banks, mutual funds, post office savings banks, non-banking financial institutions, international financial investors, and institutions.
The supply in this market comes from the savings of various sectors of the economy. These come from the following sources: individuals, corporates, governments, foreign countries, banks, futures funds, and financial institutions.
Besides, the establishment of the Nepal Stock Exchange has brought about a significant turn in the work of the capital market in Nepal, especially the liberalization policy adopted in the nineties and the automation of trading and central depository system a few years ago.
The growth of Nepal’s stock market, which has reached record highs, has also continued. The Nepse index, which measures the share market, has increased significantly and the transaction amount has also increased. Meanwhile, the Nepal Securities Board (SEBON) has stated that the participation of investors in the stock market has increased significantly as more than 85 percent of transactions are done through Nepse’s online trading system.
According to the board, the number of Demat accounts is more than 800,000 investors in the primary market of securities due to the securities market development and reform works carried out by the board. Which is about 7.25 percent of the total population. The Securities and Exchange Board of Nepal (SEBON) has issued a public notice asking the public to invest cautiously
The Securities and Exchange Board of Nepal (SEBON) has been urging investors to invest cautiously from time to time as the capital market has been setting new records day by day. The board has issued a press release urging investors to invest in the growing market with “vigilance and understanding” and not following “rumors and speculations”.
The Board’s suggestion that investors’ views on the regulatory body be made public should be made public. Investors will have to make investment decisions only after analyzing the overall financial and economic indicators of the organization. ”
The board also said that investors should analyze the financial situation of the world economy, national economy and listed organizations, the state of good corporate governance, and the ability of investors to bear the risk and invest in the market only with awareness and understanding of the security of their investment.
As some newspapers have written about the stock market heights in the contraction of the economy, Covid 19 said that the economic activity has been slowing down and the economy has been shrinking for the last year. Looking at the past fiscal years, the stock market has also seen high growth in the years when economic growth has been encouraging, i.e. there is a positive correlation between economic growth and the stock market.
However, it is estimated that the relationship between the stock market and the economic growth of the previous years will be reversed when the stock market rises in the current fiscal year, which is projected to be slower this time.
While the National Planning Commission, Central Statistics Office, and Nepal’s development partners like World Bank, Asian Development Bank, and International Monetary Fund are projecting that Nepal’s economic growth will be very good in the current fiscal year, it will be around 2 percent or almost zero percent. The record has been reached by reaching the historical issue. This suggests a need to redefine the relationship between economic growth and the stock market, which has been positive so far.
Neither the economic activity has increased nor the economy has shown any signs of slowing down. However, some stock analysts have attributed the recent departure of the former finance minister, who was known to be negative towards the stock market, and the arrival of a positive finance minister to the market. Investors determine stock prices by looking at future earnings. It’s all about income, growth, and potential.
Right now, there is a lot of hope that the economy will improve, and with that comes more jobs and more spending. Many investors are also optimistic about a practical coronavirus vaccine that will hopefully end the need for social distance and help improve some parts of the economy that are currently suffering the most (travel, food, hospitality, events, and personal recreation). Consumers have now changed their spending. Not all coronavirus epidemics have had a negative economic impact. But it has shifted how many people are spending their money. Nepal has developed and expanded the equity market sector in a very short time. Besides, there has been a significant increase in the number of listed companies, number of investors, etc. Market capitalization data through Nepal’s Nepse was reported in February 2021 as 3,40,92,56.0 million.
Investors say that going to the stock market is due to its cyclical nature. When they say cyclical, they mean that every few years, the market goes up and down. For example, after the first Constituent Assembly, the market was performing well with an index of 1,175. There was a lot of liquidity in the market as banks were in a position to lend easily. However, it crashed shortly after the 2008 financial crisis. In 2012, the index fell to less than 292.
Gradually, the situation started getting better again. Banks started merging and they started making profits. In 2013, as the second Constituent Assembly election approached, conditions began to improve. Liquidity began to improve as banks merged and in 2016 the index reached 1,800.
The cyclical nature again showed how volatile the market is, with the market falling to 1,100 in 2019. As before, the market continued to decline for about two years, after which it is no exaggeration to say that it is now in the “bull” phase.
Liquidity and remittances
Investment experts also say that the market is going up due to the abundance of liquidity in the market. Almost all commercial banks have achieved their deposit targets for the last financial year. Experts say it is proportional to market entry as people start investing in the stock market because there are no other investment opportunities
One of the reasons for the increase in liquidity is the increase in the receipt of remittances. According to the report, remittance inflows increased by 10.9 percent to Rs. 616.81 billion in the first five months of the current fiscal year. Nepal Rastra Bank and the World Bank had estimated that the remittance flow would be reduced due to Covid-19. However, the opposite has happened. But bankers and investors say the increase was made possible by the use of formal channels to send money to Nepal.The money that came through these formal channels had to be invested in places other than the black market. There are a lot of people in the stock market who believe that the amount has come as the time is uncertain until there is no place to invest.
Low loan rates and savings rates. This is also a major factor. Due to the large deposits of banks, they are giving fewer loans at 8 percent as compared to 13 percent in 2019.
Many people have started taking loans from banks of a margin nature to invest in stocks and believe that they will be repaid. If the risk is higher then it is positive
Nepse trading has gone online
Nepse officially launched its online trading system in November 2018. But people, who wanted to know, believed in going into business with brokers. Anyway, because of Covid 19, the pace accelerated. However, due to Covid 19, that changed as the Securities and Exchange Board of Nepal (SEBON) directed Nepse to encourage online trading. This means that more participation means anyone with a phone or laptop can trade without going to a broker. This access to the stock market meant everyone started investing. This goes hand in hand with the lack of liquidity and investment opportunities.
When people got stuck at home, they started investing in stocks. This also happened in India and Pakistan where the stock market started doing well after they started trading online.
Banks margin lending
Due to high liquidity, banks started lending margins (lending money backed by shares). As interest rates fell, so did various investors in the market. Lack of economic activity, stable industry, and lack of imports led banks to lend margin loans to interested investors.
The share price continued to rise after more money was thrown into the market. After that, more investors started borrowing from banks through margin lending to create a loop, which increased in Nepal’s stock market.
Banks are investing in financial institutions
Some time ago, banks were not allowed to invest in financial institutions. But, since the market started crashing in 2019, they have started investing in financial institution stocks. This trend continued as they saw potential in the market. Some stocks were worth less than their value. These stocks were used by these banks and financial institutions: one of the reasons why insurance companies have limited shares in the market and the share of microfinance, has increased.
This is an important factor, many investors claim. When the stock market plunged in 2010, many stocks in the market were likely to go up. Smart investors, who had researched these stocks, bought them. As prices rose, many quickly began to follow suit, resulting in market growth.
People were afraid of losing the opportunity to make money. For example, investing in one stock and earning one million a month. This human nature of jealousy has encouraged many people to invest in stocks. This is because if people don’t join this scene now, they will lose. An example of this can be seen in banks where hundreds of people are queuing up to open their Demat accounts to apply for IPOs.