The Nepali Stock Market (NEPSE) hit its all-time high of 2600 multiple times in the past 12 months. The bull run we’ve seen has been nothing short of spectacular and the public has seen their portfolio value increase significantly.
Every sensible investor is now wondering if the market is too high and wondering if a major correction is on the way.
So, if you’re wondering if the share market will crash then you need to consider what factors affect the Nepali stock market.
What causes the stock market to rise or fall?
These five factors were demonstrably shown to affect the Nepal Share Market by a study done by P.K. Shrestha / S. Pokhrel | SEBON Journal-VII May (2019).
- The stock market responds quite well to macroeconomic development and especially monetary sector development. A loose monetary policy could trigger an asset price bubble in the share market, which is mainly dominated by BFIs. Things such as low interest rates, more money supply (M2) etc. have a demonstrable effect on the stock market.
- Nepal Rastra Bank’s policy on margin lending (loan against share as collateral) is a key factor in influencing the share market.
- The Nepali share market is also highly influenced by rumours, news and speculations.
- Hike in paid up capital of BFIs through FPO, right shares etc. also increases stock prices.
- Positive political development nudged the share market upwards while negative developments put downward pressure on NEPSE. And these were closely watched by long term investors.
A look at the history of the NEPSE index also clues us into what affects the market.
When COVID-19 forced the government to lock down the country, the economy suffered. The GDP which was expected to grow by 6-7% only grew by 2.30%.
So, if the economy suffered then why did it not affect the stock market? Well, it did. The market index did see a drop of approximately 400 points from around 1600 to 1200.
The NRB in response to the unprecedented impact of COVID-19 on the economy:
- Reduced interest rates,
- Increased the limit on margin lending to 65% of the share collateral (up from the previous limit of 50%), and
- Increased the money supply (M2) which is up 23% (Broad Money Growth according to NRB). And more all in an effort to give the flailing economy a boost.
But just these factors alone do not fully explain the unprecedented growth we have seen. So, what does?
The effect of new money
As money sitting in savings accounts were getting a lower rate of return due to the drop in interest rates, people started looking for better returns. And they found the stock market.
As of March 2021, there are now a total of 32,26,111 citizens in Nepal who have a Demat account according to the official website of CDS and Clearing Limited. In addition, there are a total of 6,27,662 active clients in all the broker offices with 2,43,348 active online accounts. If even a small portion of these investors start investing actively, the volume of participation that we’ll see in the secondary market is truly unimaginable.
The “digitisation” of NEPSE with the introduction of the online Trade Management System (TMS) has made it easier for many newer investors to trade in the secondary market.
More new investors coming into the market means more money pouring into the market which creates demand on what is a finite amount of stocks. As more and more new investors flow through the demand has put upward pressure on the NEPSE index.
Investors have poured money into companies with low earning potentials such as Upper Tamakoshi or widely overpaid for shares of Chandragiri Hills Resort.
Can you predict a stock market crash?
The book by Scott Nations, History Of The United States In Five Crashes, seeks to answer this very question.
The central idea of the book is the fact that, the most obvious phenomenon in all stock market crashes is the steep appreciation in the stock market prior to the crash. Precisely how the market appreciates is common to all crashes; two year periods of particularly aggressive buying inside a robust decade are common just before most of the crashes.
The stock market is vulnerable when it has rallied strongly in the recent past and is now beyond a level that might generate a reasonable return.
What sets off the crash itself is the unknowable or unforeseeable element. In 1907 it was as random as an earthquake, while in 2010 it was a riot in a place far away.
The catalyst will push the market toward chaos. If a poorly understood financial contraption then causes selling at the worst time, we’ll get our next crash.
By comparing the phenomena common to every crash we can better understand the stock market and how it continues to change.
What will cause the next big crash in NEPSE?
The biggest factor could be Nepal Rastra Bank’s policy on interest rates and margin lending as well as monetary policy that could potentially cause the next crash.
There are many situations where NRB could be forced to raise interest rates or limit margin lending. One is high inflation, another is formation of asset price bubbles whether in the property market or the share market.
Yet another factor to look out for is the percentage of Non-Performing Loans in the financial institutions. A rise in NPL could see these companies’ earnings significantly reduced.
On the other hand, this bull run could go on for much more than we might expect.
Also, the latest entry of Nagarisk Stock Dealer (CIT’s subsidiary) into the market is expected to add significant additional buying power and liquidity into the system. And it is no surprise that in a single day, (1 March 2021), they bought Rs 57,253,656 worth of shares. It may just be that they’re just to ramp up.
What do you think? Are we going to see another bull run or is a crash imminent?