Growth, but defying market fundamentals

Nepali share prices have been climbing a new high every day heading to 700 points mark with gains led by banks and financial institution in the recent months.
The financial companies, especially the commercial banks led the latest rally on hopes of bonus shares ands rights shares. The banks (commercial and development) and financial institutions (Bittiya Sanstha) have to increase their capital proportionately each year, according to the central bank's policy. Buoyed by this speculation, the investors are ignoring the market fundamentals, which can be fatal.
“The banks has no option than to issue bonus shares if they are making profit or right shares if they are not making profit,” says Niranjan Tibrewal, an investor.
However, being bullish on only the financial institutions can be justified if there is a strong credit demand in the market, which is not the case; or hike in public lending rates, which is even shrinking due to cut-throat competition.
“If we follow the history, 1929's global market crash led to the economic depression of 1930's,” says Prof Dr Manohar Krishna Shrestha. Bulls charged forth but the economy has not grown in a way that can sustain this 'exaggerated growth'. When the economy does well, it is obvious that banks and financial institutions do well. But the question is has our economy grown.
Some investors' pool has created an 'artificial boom' that is not a competitive drive. The upward movement that has been witnessed only in the last month of fiscal year proves that the investors are calculative, if not fool. They are taking calculative risks and pouring their money into the stock market.
The market, now, has to be regulated without damaging the investors' confidence as some people are playing on the investors' sentiments. The immediate gains that have lured some to play foul will lead to a bubble burst.
“The buying momentum is strong, there is more demand in the market than supply that is also leading to the price hike,” says Rabindra Pradhan. Stock market is, however, trying to cool investors enthusiasm for stocks -- by publishing notices regularly to be aware while buying -- after speculative frenzy set regulators on edge over a potential crash.
“Though the present trend may continue till this year, due to the crowding effect,” Prof Shrestha says adding that manipulation is evident.
Since last couple of months investors had ignored repeated warnings of the regulatory authority about the run-up in the share prices, but after yet another volatile week, investors' appetite for investing does not appear to be diminishing. But the market fundamentals do not support this buying frenzy, which could result in punters losing everything if the speculative bubble were to pop.
The share of the companies, which has negative net worth, is also increasing along with the companies that are making profits, which shows that lack of opportunities of investment and low interest rates have contributed to this bullish trend. But the market has to follow certain norms. The rise and fall in the prices of shares of any company must have some rationale. But current market trend does not follow any.

Books Vs Brokers
Economists and the regulators feel the current bullish trend as an irrational behaviour. Investors are attracted towards the stock market because the index of financial sector and service sector is rising but they are not aware of the real financial situation of the company, on which they are betting their hard-earned money.
According to the economists, the investors must know the financial condition of a company like how much deposit it has, how much is the bad loan, who are in the management, how much profit has it made in the last quarter, and what is the return on equity.
“The bonus shares they are after is only paper benefit, the investor must know the difference between the paper profit and real profit,” says Prof Dr Manohar Krishna Joshi. There is a risk when one invests on only one company. The intelligent way is to invest on many companies at one time to minimize the risk in such a volatile market.
“Diversification of portfolio is yet another smart way of investing currently,” suggests Rabindra Bhattarai, a stock analyst adding that the net worth of a company is more important factor to look into before investing on any company. “Are capital increase and profit proportionate,” it is yet another question one should ask before buying shares of any company.
“According to the market fundamentals, current growth is not justified,” Joshi adds. The growth should sustain in a long run otherwise the bubble will burst and a lots of petty investors find themselves on the road overnight.
However, the brokers think it is an accepted practice. “Only the perception is different,” says Navraj Pokharel, president of Brokers Association. He outrightly rejects the accusation of brokers being party to the manipulation in the stock market. “The economists want to draw the map but we follow the map,” he says.

The movers and shakers
Only profit and loss of a company can justify the rise and fall in the share prices of any company. The current rise in case of some companies is justified and in some cases it is not.
Stock exchange should disseminate information to the investors regularly and educate them to protect their rights. “It publishes a notice as a ritual and thinks that it has fulfilled its duty,” Surendra Bahadur Singh, director from the investors, Nepal Investment Bank (NIB), says adding that many investors even do not know the market reality and follow the whim only. “They follow the big investors.”
All investors are equal but some are more equal than others. Thus 'the big' investors have every reason to manipulate the market for their personal gain. “There is more dirt in the stock market than one can imagine and that justifies the raids at some of the brokers office last week,” says one investor without wanting to be quoted, adding that those people operate in a group.
However, Niranjan Tibrewal, director from the investors at the Standard Chartered Bank Nepal differs. “Operators manipulate globally,” he says adding that it might be the same case here also. “The change in monetary policy three times in one year last year gave them a fair share of benefit. It's the operators sheer luck also.” The decision to increase the paid capital by all the financial institutes is the major reason for the investors to invest in shares. “They know before hand that the banks will give them bonus shares or rights shares, in any case they will gain.”
Rise in the prices of only Commercial Banks group, Development Banks group and Financial Companies groups' indicates that the growth is not linked to national economic growth. “That is because if the economy grows banking sector gets the benefit first and if the economy is hurt, banking sector is the last one to be affected,” Tibrewal says.
Traditional Market is one of the reasons for the present situation. Thus, the Stock Market needs to be modernised. “It should apply Central Depository System (CDS) to grow as a vibrant sector. CDS can minimise the troubles for the buyers,” Singh says. According to him, the brokers' commission should also be lowered from what they are charging right now.
The secondary market is virtually on fire in recent months. “The stock market is currently heating because of the lack of investment opportunity. We need other investment opportunity where there is good return like mutual fund so that the petty investors can easily invest and get good return,” Singh further says.


Nepse feels the heat
The market is heating and it's obvious that Nepal Stock Exchange (Nepse) is feeling the heat more than anyone else. Why? “Because it's our duty to safeguard investors' interest,” clarifies Rewat Bahadur Karki, general manager and CEO at the Nepal Stock Exchange Ltd. “One bad fish spoils the whole pond. Thus, we cannot but remain silent when 'some investors manipulate the market and majority of the ignorant investors lose.”
“To regularise the market, we are introducing automation -- which will be one of the major tools for regulating the 'unjustified rise in share price' -- from 18 August,” he informs.
Siddhanta R Pandey, managing director and CEO Ace Finance Company Ltd (Bittiya Sanstha), agrees. “The first day of the stock market will be the day it starts automation,” he says adding “Vigilant stock market is another need of the hour to protect the interest of Nepali investors.”
The Stock market is also thinking of bringing 'Brokers code of conduct' to make it more self-disciplined.

The History
The history of securities market began with the floatation of shares by Biratnagar Jute Mills Ltd and Nepal Bank Ltd in 1937. Introduction of the Company Act in 1964, the first issuance of Government Bond in 1964 and the establishment of Securities Exchange Centre Ltd in 1976 were other significant development relating to capital markets.
Securities Exchange Centre was established with an objective of facilitating and promoting the growth of capital markets. Before conversion into stock exchange it was the only capital markets institution undertaking the job of brokering, underwriting, managing public issue, market making for government bonds and other financial services.
Nepal Government, under a programme initiated to reform capital markets converted Securities Exchange Centre into Nepal Stock Exchange in 1993.
Nepal Stock Exchange (Nepse) is a non-profit organisation, operating under Securities Exchange Act, 1983.
The basic objective of Nepse is to impart free marketability and liquidity to the government and corporate securities by facilitating transactions in its trading floor through member, market intermediaries, such as broker, market makers etc.
Nepse opened its trading floor on 13th January 1994.
Since then, it has witnessed its share of highs and lows. The market saw a swing in the beginning as it slowly gained the confidence. But from 2000 again it witnessed the downward trend till 2005. When the country returned to normalcy after the political settlement, the stock market revived. Now the market is on a cruise mode.