When Bulls Run To Bush

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The index of Nepal Stock Exchange, Nepse, climbed to 800 after five years early January 2014. Since it closed at 963.36 in mid-July (end of the Nepali fiscal year) 2008, it had barely crossed 500 until last June. It had terribly disappointing bearish tumble for all five consecutive years as shown in the side table. The Nepali bourse has often behaved beyond any rational expectations and market analysis. There was no reason for it to fall as low as below 300 in 2011 and even at present the speedy bull run is not fully justifiable. The index has climbed about 50 percent from 529 points in mid-July 2013 and to 780 mark on third week of January 2014.
Nepal Stock Exchange IndexInterestingly, this rise is witnessed when trading of stocks of a number of new companies, mainly the new commercial banks, began. The situation apparently is of over-supply and there has not been any substantial change in economic fundamentals to push the Index up, except the fact that last CA elections saw the defeat of hard-line communist forces, like Maoists. If the investment were to be made for returns, this political change alone would not perhaps be enough to ensure higher 
yield. But, investors do not seem to be bothered by this.
To some extent, the volatility of the market by its nature is understandable, but the reason d’être of this, generally, is however never beyond comprehension. At least, it should not have been the case given the availability of modern-technology assisted analysis, both fundamental and technical. But that is what exactly happening in Nepal.
When markets run amok, bullish or bearish, without any convincing economic explanation, there is no reason to be happy. Nepal’s capital markets have some basic characters that make it very risky. It is not only unintegrated to the international market, but also lacks even a few traders who would trade in Nepse and some other international exchange, simultaneously. Therefore, the impact of international market in Nepali secondary market can be completely ruled out. The real sector, for all practical purposes, has no presence in the capital market and it is dominated by the financial service providers, a few hotels and lately some hydropower companies. This means, our capital market trends do not necessarily reflect the degree of fitness of our economy. And, except for some time-trained crooks, there are very few informed or educated investors, causing mismatch between the expectations and returns.
The regulator is equally novice and naive. Political appointments of the people to the Stock Exchange Board who lack specific knowledge about the trade have made the situation worse. The most dangerous part is that, no public agency is even contemplating about the possibilities and procedures of listing more real sector, mainly manufacturing, companies into secondary market. It is indeed an uphill task since it requires much higher level of willingness of the private sector to register in the bourse. It in turn requires transparency at every step of the transaction of the companies from, imports, customs evaluation, VAT and excise, sales, and ultimate balance sheet and auditing. Nobody seems prepared for this mammoth task that has not only economic cost but also demands a high degree of business integrity and honesty.
But, without bringing the real sectored on the trading screen, the rationale of the secondary market could hardly be justified. The result, it will continue to be victim of irrational volatility. The new government that will be formed soon should take three major steps: first appoint knowledgeable persons of the sector in the regulatory board, second create a joint platform of Nepal Rastra Bank, the Board, Ministry of Finance and the private sector to promote financial education about the secondary market and begin brain storming to identify the causes that are hindering real sector to enlist in Nepse and resolve them. Only this will create a credible stock market in Nepal.

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