Photo: Naresh Shrestha / THT
Lack of loanable funds and also awareness among investors in the secondary market has been a recurring problem since long. Investors often blame the government for not addressing their demands and the government in turn often accuses the stock investors of manipulating the market. As this blame game continued, the Nepal Stock Exchange index dipped to 1,118.13 points on December 5, the lowest point for the year. However, the government did address some of the concerns raised by investors on December 19 and since then the share market has seen some gains. In this context, Umesh Poudel of The Himalayan Times spoke to Bijay KC, dean of Kathmandu University School of Management, to get a proper insight into why Nepse has been in the doldrums for most of the year. Excerpts:
On July 27, 2016, Nepse had soared to an all-time high of 1,881.45 points and literally, anyone with any knowledge about shares was investing in the stock market. But the market has not been able to climb to such a high since then and moreover this year its performance has been dismal. What could be the reason for this downtrend?
The first reason is that Nepse is not guided by fundamental principles but by speculation. Most investors do not study the market before investing and follow the prevailing rumours. If they see the market rising they start buying shares and if it is going down they start selling without any proper analysis. I think Nepse, Securities Board of Nepal and Nepal Rastra Bank should work collectively to address the core problems in the market, which is not happening. The share market movement should be gradual but in Nepal it is very volatile because of lack of awareness among investors. Moreover, banks and financial institutions and some big firms are not issuing enough shares due to which market has not been able to expand as expected. Since a majority of the firms in the market are banks and financial institutions Nepse has not been able to grow much. For any stock market to expand there must be the presence of real sector companies.
The government recently increased the loan to value ratio for share purchase from 50 to 65 percent. What is your comment on this?
The government recently raised the loan to value ratio for share purchase. This move by the government has made many investors happy as they will now be able to get more loans. However, we should realise this is not a long-term solution. If the government keeps increasing this ratio then it could invite an economic crisis. Hence, I believe that investors also need to change their attitude because taking a loan is not a big issue. The issue is about paying back the loan with interest. It is a grave issue because if the market crashes then investors will not be able to pay back the loans and it will hit financial institutions, which will in turn affect the larger economy.
Are there any other measures that could be adopted for the overall development of the stock exchange?
The regulator needs to allow the stock exchange to develop as per the market fundamentals and should not interfere much. One important step that it could take is try to discourage people from investing in shares on speculation by conducting awareness programmes. The country should start financial literacy programmes so that people are aware about the benefits and drawbacks of the share market and the way it functions. It might seem a tough job at present but will lead to the market functioning in an effective manner in the long run. What I have noticed is that the government is trying to manage the market through taxes. If there is a large investor who tries to manipulate the market then only should the government interfere. Otherwise, the government should not be interfering there. The other problem is that companies do not publish information in a timely manner. When companies fail to do so they lose the trust of the share investors. So, if accurate information is published on time then it will go a long way in gaining the trust of investors and the market will witness more players. This in turn will make Nepse more vibrant.
Banks and financial institutions have not been able to supply enough funds to borrowers since the first quarter of the current fiscal. This liquidity problem has been going on for many years now. How could we solve this issue?
The grey economy has been thriving in the country. The share of the informal sector is very high. What you can notice is that even if the country witnesses seven percent growth or three percent growth the import of luxurious goods and vehicles for instance is always the same. This indicates a grey economy in the country which needs to be controlled. This will help channelise funds to the financial institutions and subsequently the liquidity situation will improve. Another perennial problem that we have been facing is the low capital expenditure by the government. These are some structural problems in our economy which need to be rectified. I feel that the central bank also needs to be more aware about the liquidity situation in the country and pump in money when and as required. And when there is surplus liquidity, it needs to withdraw funds from the market to stabilise the situation.
Every time any concerned authority makes any comment regarding Nepse, the share market witnesses a fluctuation. Does this not indicate that the country’s capital market has still not matured?
As an academician, I feel financial literacy among investors in Nepal is very poor. There are many investors in the capital market who actually have no idea on how the market functions but are participating in it on ‘hearsay’. Even when a person who is not a financial analyst makes a comment on Nepse, we can see massive fluctuations in the market, which is a sign that the market has yet to mature. Even though trading at Nepse started in 1994, we have not been able to develop the market as anticipated. However, there are more informed investors at present than in the earlier days. So, it will probably take a few more years before the share market in Nepal fully matures. Another thing we need to look into is that the economy of a few countries like Nepal, India, and Germany is dominated by financial institutions whereas there are others like the United States, United Kingdom and China where the economy is dominated by the market. I personally feel that if we want our economy to progress then we need to have a market-oriented economy.
Sources: The Himalayan Times