Stock Market

Stock market Performance Dismal

By Bhaskar Sharma

The Nepal Stock Exchange (Nepse), the country’s only secondary market, has been performing dismally for the last few months. In fact, if its performance is evaluated in terms of the highest mark that it attained in the past, the fall has been extreme. And the causes are both domestic as well as international, due to which the Nepse Index, the barometer to Nepali investors’ confidence and an indicator to the secondary market effectiveness, has fallen drastically.

In the first six months of the current fiscal year alone, the Index dipped from 352.25 to 265.62 points. The Index continued to fall even after January 15 touching 187.88 points as of March 15. The slump in the Index has caused erosion in the stock market wealth to a large extent. The stock market lost over Rs 8 billion in capitalisation in the first six months of the current fiscal year. And comparing the mid-July figures to mid-March 2002, the loss is well over Rs 18 billion, a huge loss for Nepali investors.

On the domestic front, various new directives issued by the central bank introducing more stringent provision forcing banks, finance companies and even the co-operatives to greater provisioning for loan loss thereby resulting in downsizing of net profits have put caused the investors’ confidence to wane. Since financial institutions, especially the commercial banks, occupy a lion’s share of the stock trading, any fluctuation in their price is directly reflected in the Index. The prices of the shares of commercial banks in the past eight months have gone down drastically thereby causing a slump in the Nepse Index to that extent. Another factor that has affected the stock business is the imposition of capital gains tax since the current fiscal year. Though its impact would have been nominal, its imposition came at a time when the stock market was already in a downturn further contributing to creating an unruly environment.

At the international front, the slumping global business, which began with a downturn in the booming IT sector, has contributed to the erosion of investors’ confidence world over. One of the factors that led to a poor stock performance is the recent collapse of the energy-giant Enron Corp., which discouraged investors globally. Though Enron’s collapse did not have any direct impact as such, nevertheless, investors in Nepal limped along with the global downturn in stock business. Also, the slowing down of business activities in the domestic front, which is explained by slumping import of raw materials for industries, is another reason why stock performance is on the downhill. Until and unless the current trend in business activities is not captured, stock market cannot be expected to boom.

The direct impact of the bearish stock trading is now seen in gold and real estate transaction. Gold prices all over the world had climbed up recently amid sliding investors’ confidence, especially in the wake of the Enron collapse. Weak stock performance in Nepal too caused the domestic gold demand to rise to some extent, though the international gold price remains as the major cause of gold price fluctuations in the domestic market. Gold prices in Nepal recently had touched a five-year high at Rs 7900 per ten grams. The gold prices in the domestic market, as of March 31st, stood at Rs 7845 per ten grams. And that is over eight per cent increment as compared to the price of January 1st, 2002. Even the price of silver has registered an increment. Silver price as of March 31st stood over Rs 130 per ten grams, against Rs 123 on January 1. Both gold and silver cost even lesser in the last year.

As a result of weakening stock prices, in addition to the security concerns lately, investors are seen to be diverting their investment in real estate. The real estate business that had collapsed in the 90s now seems to be on an upturn. Real estate prices lately have gone up after a stagnation of around seven years and land transactions now are on the rise. The testimony to an increased real estate business is an increase in the number of land transfers and registrations as evident from the data revealed by land offices.

Another indication to the upturn in the real estate sector is an increase in the prices of various construction materials lately. The price of bricks and cement, two of the most important construction materials, has gone up, which is indicative of the fact that their demand is high. The price of bricks alone leaped from Rs 1600 to Rs 2700 per one thousand units.

Another important impact seen as a result of the slumping stock business is on the amount of deposits in the commercial banks. Since investors would not like to put their money in the stock market during bearish periods, an increase in deposits is usually seen. Looking at the recent trends in the deposits of commercial banks, it is evident that investors are still looking for investment avenues. Against the usual rise in time deposits, there has been a substantial stocking of money in current accounts, which most likely shows that people are willing to make speculative investment at the slightest chance.

Share Prices in Nepal Stock Exchange
(Closing Prices Only)

NB: Bank cells indicate that the respective scrips were not trade on that day