The rise in Nepal Stock Exchange (Nepse) index that began soon after the results of the second Constituent Assembly (CA) elections continues. Nepse index which had closed at 600 points on November 14 before the Nov 19 CA polls has now risen to above 800 points. Thus, after the Nepse index rose by around 30 percent within a month, share investors, analysts and the media have put forward some reasons behind the continuous bullish trend.

 

The victory of pro-free market political parties in the election, decrease of interest rates in the banking system and the directive of Nepal Rastra Bank (NRB) to implement Basel-III in banks and financial institutions are some of the reasons behind the sudden rise in the stock market. Those who are skeptical about the rise are claiming that this is not a natural rise but the result of speculative investment by some ‘players’ of the stock market as the reason. 

 

However, there are some macroeconomic factors which suggest that the rise in the stock prices could be natural. For example, the latest manufacturing index shows that the manufacturing sector is growing. Similarly, the growth rate of the country’s trade deficit has decreased significantly in the first four months of the current fiscal year as compared to the same period of the previous fiscal year. All political parties have, in their election manifestos, committed not to organize bandhs and general strikes in the days to come. This could have boosted the morale of the investors.

 

The political parties now need to walk the talk. They should not organize any kinds of bandhs and general strikes. The people voted for a change in the elections held last month. Now the investors are supporting that change by showing their confidence in the stock market. The donor agencies and Nepal’s development partners, too, should not support any kind of bandh or strike under any pretext.

 

This, however, doesn’t mean that the investors don’t need to be watchful. The information disseminated by all media or newspapers about the rise in Nepse index may not be the gospel truth. Similarly, some information could be misunderstood. Therefore, investors – old and new ones alike – should carefully analyse all the information before they decide to sell or buy the shares. 

 

In this context, what the investors need to understand about NRB’s directive regarding the implementation of Basel III – said to be one of the main reasons behind the rise in the price of banks’ shares – is that this is not an entirely new development. The central bank had introduced this concept three years back with the purpose of implementing it gradually. The implementation of Basel III doesn’t mean that all banks and financial institutions have to raise their paid-up capital to Rs 5 billion. What Basel III means is the banks need to increase their capital adequacy. It doesn’t mean that all banks must increase their paid-up capital. Similarly, the victory of the supporters of free market economy in the CA elections has certainly boosted the confidence of the general public and investors. This looks like one of the major reasons behind the rise in the Nepse index.

 

However, the political equation of the next government to be formed is not clear yet. The economic policies to be adopted by the new government, too, are not clear, now. Therefore, it will not be wise to simply assume that the Nepse index will, like after the 2008 CA polls, cross the 1175 points this time too. Any investment on such an assumption could be risky; the investors should carefully analyse their risk-taking capacity and invest accordingly.

 

Nevertheless, there is enough liquidity in the banking system at present, causing the interest rate on deposits to come down. So, the amount which would otherwise have gone to the banks in the form of deposits has come to the share market. On the other hand the demand for shares is more than the supply at present. Similarly, one of the fundamental indicators that is used to evaluate the market price of stocks is the Price-Earning (PE) ratio. Although the PE ratio of some listed companies is as high as 75 per cent, the average PE ration of most of the companies is around 20 percent which is natural. Therefore, the socio-economic condition of the country and the fundamental as well as technical indicators of the listed companies reveal that there is still the possibility of making money by investing in shares.