Nepal Stock Exchange (Nepse) index gained 17.32 points on Monday to close at an all time high of 1,238.02 points on the second trading day of the week.
Observers say that the bullish trend in the stock market at a time when the economy is in doldrums defies the notion that the stock market is considered as a mirror of the economy. “In theory, the stock market should reflect the economy of the country. However, the recent rise in Nepse index speaks something different. It shows that our stock market is completely isolated from the macroeconomic fundamentals of country,” said stock market analyst Gopal Prasad Bhatta. “The stock market is solely driven up by investor sentiments which seem to be determined by political hopes, rumors, speculations and herd mentality,” Bhatta, whose doctoral thesis was on 'Stock Market Efficiency in Nepal', said.
Amid Tarai unrest, unofficial economic blockade and trade disruptions, Nepal Rastra Bank (NRB) - the central monetary authority -- has warned about risk of stagflation as well as possibility of contraction on the economic growth. While issuing the white paper, the government had revised the economic growth projection downward to 2 percent for 2015/16 from the initial target of 6 percent as stated in the budget speech.
“The economic outlook of the country is not positive from any point. However, the stock market is acting in a strange way without caring about what is happening to the economy, giving a message that there is no co-relation between the secondary market and the economy of the country,” he said, warning that the unnatural and speculative rise of the market spells risk for the small and new investors of the market if the market crashes.
Many stock brokers also attribute excess liquidity in the banking system behind the stock market's surge. “Investors are getting no other investment opportunity while the liquidity surplus is driving down interest rates. The money is coming to the stock market which has increased buying pressure,” Anjan Raj Poudyal, former president of Stock Brokers Association of Nepal (SBAN), said, urging investors to trade in the market cautiously. “Otherwise, there is no solid reason for the market to go this high. Most of the companies have already distributed dividends. Also the economy is not in good condition,” he added.
Bhuvan Dahal, CEO of Sanima Bank, said that such speculative warning cannot be ruled out in the stock market when the interest rates keep falling.
“Those who used to deposit money in the banks might have already been tempted toward speculative investments. A reason behind the recent spectacular growth of stock market might be the ultra-low interest rates on deposit. There are also chances of rise in real estate prices in the near future if this scenario persists,” said CEO Dahal.
Deposit rates are already down to one percent level. Most of the commercial banks offer deposit interest in the range of 1 to 3 percent.
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