Secondary market reflects economic growth

Though secondary market has been hovering around 356 points lately, investors need not worry, as it just reflects the country's economic growth.
Once the economy starts picking up, the share market will also perform better.
Unlike traditional school of thought, domestic share market did not use to reflect country's economy but in the last five years, the Nepal Stock Exchange (Nepse) index has started reflecting the country’s economy, according to a study by Securities Research Centre and Services (SRCS).
When there is surplus savings, the prices of shares increases. “But the plunge in employment and low savings have pulled the share market in the recent years,” said former chairman of capital market regulator Dr Chiranjivi Nepal.
The correlation between the secondary market index and economic growth is positive. “The correlation between then stands at 0.61, which is positive,” according to the study.
“Since last five years, the domestic secondary market has started to reflect real economic growth,” chairman of the SRCS Rabindra Bhattarai said, adding that macroeconomic indicators like interest rates, price hike, employment and microeconomic indicators must reflect in the share market.
However, the impact of economy on share market is 37 per cent, meaning still other factors like investors’ behaviour and manipulation are prevalent. During the high days of share market, when it touched all time high of 1,175 points in 2008-09, the Price Earning (PE) ration of some companies that has no growth prospect also touched 400. But a company that has no growth prospect and has PE ratio above 25 are over-valued by the manipulators.
“The share market started reflecting economic growth also due to listing of the shares of those companies that have more contribution in the growth,” he said. The telecom sector contributes nine per cent in the GDP growth and the listing of Nepal Telecom share has made the share market more realistic too, whereas banks and financial sector has one third domination in the secondary market but they contribute only four per cent in the GDP.
“The listing of more agro-based industries like Dairy Development Corporation will make share market a real mirror of the economy as the agriculture sector contributes 33 per cent in the GDP,” he said, adding that the hydro power companies like Chilime Hydro and Arun Valley Hydro have also made the share market more reflective of economic growth.

Fiscal year – GDP growth rate -- Nespe Index
2007-08 – 5.8 per cent – 963.36 points
2008-09 – 3.77 per cent – 749.10 points
2009-10 – 3.97 per cent – 477.73 points
2010-11 – 3.47 per cent – 377.63 points