The last time the stock market had risen to this level was on August 29, 2010, when the benchmark index had stood at 428.93 points.
On Monday, the market, which opened after two days of public holidays, went up by three percent within eight minutes of commencement of trading at 12 noon. [break]
Following this, the trading was halted for 15 minutes. But within two minutes of resumption of trading after 15-minute hiatus, the index rose by four percent. As per Nepse rule, four percent hike in share prices should be followed with half an hour trading suspension. Yet this did not cool down the market rally. And within five minutes of resumption of trading, the stock market index surged by over five percent, which propelled the market operator to suspend trading for the day.
Although the trading continued for only an hour on Monday, compared with three hours on ordinary days, the stock market recorded transaction of Rs 144.83 million.
“The only reason behind the current stock market rally is positive signal coming from the political sector,” a senior official of Nepal Rastra Bank told Republica on condition of anonymity.
His comments stemmed from commitment expressed by political leaders to promulgate the constitution and conclude the peace process within the deadline of May 27. “On top of that, the process of integrating former Maoist rebels in the national army is moving ahead in a positive direction, which has made many believe that the security situation would further improve in coming days,” the official said. “These developments have made many believe that the economy would grow at a faster rate and investment that they have made would generate more capital.”
Historical evidences also show positive correlation between improvement in political climate and surge in stock trading, according to Suman Rayamajhi, director of Beed Invest, a portfolio management service provider. “This is because investors start speculating during such times,” he said.
In the present situation, this renewed investor confidence is receiving backing from changes in deposit and lending rates causing the stock market to rally. Lately, both deposit and lending rates have come down. This means a portion of depositors may have lifted money parked in the bank and put it into stock market.
“This is the same with lenders, who now have the privilege to acquire funds from banks at cheaper rates,” the NRB official said, citing this as one of the reasons that is “causing the market index to surge”.
But again, history shows that such sudden rise in stock prices, that are not backed by fundamentals like improvement in financial condition, are not sustainable, Rayamajhi said.
Currently, stock prices of many listed companies are rising in an unnatural way despite no significant change in their profit levels or other indicators like service expansion.
In fact, profit of banks and financial institutions - which make up more than 70 percent of listed companies - fell in the first half of the current fiscal year. These institutions are expected to report lowered profitability when they make their third quarter results public and the situation is not expected to improve by the end of this financial year.
“Yet stock prices of banks and financial institutions are rising,” Rayamajhi said, calling the surge “unnatural and thus unsustainable”. “Investors will wake up to the reality when banks and financial institutions make their annual figures public, which will once again cause the stock prices to go under correction.”
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