NePal's economy is full of surprises. What can go well with a weak economy? Strong share trading of course! The stock market surges at record level despite of sluggish economy. The Nepali stock market registered exceptional jump doubling the market index in the summer of 2007. Can we explain any positive signal of economy that generates cheerful environment charging the 2007’s bull to a new high? We anticipate that the Nepali Stock market will continue to surprise us as it no longer represents the country’s economy.
In 1912, the shipbuilders, Herland & Wolff had managed to convince the public that their latest creation, the Titanic, was unsinkable. Today, the speculators in Nepali stock market seem to be spreading the same propaganda. They advocate that current market trend represents investors’ confidence. They dismiss concerns about overpriced markets by citing a new economy where the old stock valuation rules will no longer apply. This is apparently inducing investors to discount the entire negative scenario to shove more money into stocks. This belief has several fatal flaws.
A rising price on any share will attract the attention of small investors. Not all of those investors are willing or interested in studying the intrinsic value of the share, or sometime they are unaware of the need of such study. For such people, the rising price itself is reason enough to invest in that stock. However, the volume and number of shares that treaded into the stock exchange are not enough to support further price rise.
Let’s examine the crucial question “Will the 2007’s bull cool in the winter?” If yes, what can be the reasons for cooling it? We certainly subscribe to the view that after every bull market there will be bear market and vice versa. Every rally and plunge has rational justification and can be predicted with fair degree of accuracy. However, Nepal ’s stock market is not susceptible to fundamentals. In such a situation, one might ask: when and how do the bull markets end?
Looking at the way the stock market has gone in summer of 2007, we have a hunch that the bull must have found a bunch of naughty market speculators who are driving it unpredictable. It seems the market is in the grip of few investors who can manipulate stock prices according to their will. Hence, it is very difficult to predict Nepal ’s stock market. Bearing these facts in mind, we will, however, try as far as possible to predict the investors’ sentiment towards the Stock Market in the winter.
First, the political instability will be the most important reason for the stock market crash. Political instability will have significant impact on the economic growth. And the stock markets always negatively respond to non-economic turmoil. Corporate investors never like political instability and they will book profits and go to another market, to another country.
Secondly, Nepal Rastra Bank (NRB) has imposed some of the stringent measure to regulate the 2007’s bull run of the stock market by tightening credit flow against the security of the stock. Further, NRB has fueled stock market by relaxing trade restriction on promoter’s share. However, NRB cannot put any curb on the credit flow of cooperative financial institutions as they do not fall under NRB’s jurisdiction. Cooperatives are playing vital role to stimulate the stock market. Therefore, to some extent the shock of the new regulation will be absorbed by the Cooperatives. But that will not be enough for equilibrium. It will indeed test the strength of speculative investors. All of these arrangements will start showing their impact within and after this winter.
Thirdly, when the market rises too a new high within a very short span of time, single negative news will create havoc in the stock market. We have witnessed a speedy rally in the stock market in the summer of 2007. One should be very careful that an exaggerated bull market fueled by speculation will lead to a stock market bubble helping further to propagate the bubble whereby everyone is investing with the intent of finding a greater fool. In turn, the additional investment will provide buoyancy to the price, thus completing the loop of ‘rules fools and fools rules’. But, often, when the phenomenon appears, stock pundits try to find a rationale, so as not to be against the crowd hence, creating “tycoon effect” and forcing the market to behave irrationally.
Fourthly, as the political analysts say the Constituent Assembly polls are inevitable, the government will prefer people over companies and ignore various economic agenda. In general, during the political transformation period, the political and economic agenda cannot go on parallely. Results of the Constituent Assembly polls will determine the outlook for the stock market. Populist policies till the polls will slowdown the momentum which will create nervousness in the stock market.
Fifthly, there will be continuous slowdown in the economic growth and the major reason will be the lower contribution from the industrial sector in the growth. We cannot expect any improvement in the contribution of the agricultural sector. The service sector may perform well for some time. But a growth in the service sector without corresponding growth in other sectors of the economy will create bubble effect hurting the investors’ sentiment towards the stock market.
Sixthly, smart investors always book profits and go out of the market just before any crash as they are well informed and can easily move in and out of the market. Less informed and greedy investors always lose money in every crash. Examine whether you receive enough information about your outstanding investment. Decide yourself whether you are greedy or not.
2007’s bull heat may cool if the investors start responding to problems faced by the country, problems that most of us are well aware of. If a correction is made on falling investor confidence igniting panic sale, money in the market will evaporate within no time. Then we do not have to pursue hydro energy, we will have a cloudburst!
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