Dwindling NEPSE Index Left Alliance Not To Be Blamed

Raj Kumar KC

 

With the announcement of the left unity early this month, the index of Nepalese capital market is reported to have crashed continually. It may be too early to make any comments about the downfall of the market. The current bearish trend may have occurred owing to long holidays and festive mood of investors as the investors in the Nepalese capital market normally wait for full business days to make investment. This kind of downfall used to occur in the previous years too.


 

Bearish trend

The announcement of left alliance might be a coincidence to trigger a bearish trend in the market. But the left alliance alone cannot be a single cause to bring down the NEPSE index by almost 33 points at 1500.  The size of the Nepalese capital market is gradually increasing along with the size of the economy, but the volume of transactions is very small in comparison to other South Asian countries. Besides, the history of capital market is not too long and it is yet to be matured.

The capital market often reflects the overall economic paraphernalia determined by multiple factors of micro and macro economy. Apart from economic indicators, political and social factors equally impact the market because changes in the country’s politics affect a number of economic activities such as change in the interest rate, rate of return on investment, balance of payment, etc. Even minor political incident can influence the mass psychology (of investors).  Terrorist attack in which dozens of people were killed in London in 2005 had a severe effect on the stock exchange which took almost a month to regain confidence of investors in the share market.  It is the fact that the domino effect of any political or social incidents is revealed in the share market. Higher the economic growth, bigger the index of share market will be.

It is the fact that investors/ traders in the capital market are yet to be proficient in terms of making investment. Most of the investments are made without a proper market analysis. On the one hand, investors hardly analyse the trend and make investment in the areas where there is quick return.  On the other hand, the concerned authorities that govern share market do not take any initiatives in educating investors/ dealers. On top of that there is a lack of monitoring system. Owing to absence of effective monitoring system, a handful people in the decision-making body are reaping undue benefits.

According to Nepal Rastra Bank (NRB) statistics, the Nepalese economy is not in good shape as the volume of trade deficit has been on the rise since July this year. The deficit trade has increased and the remittance flow has declined significantly in comparison to the previous years. As per the overall estimation of Asian Development Bank, the economic growth has declined to   4.7 per cent from its own   projection of 5.4 per cent.

However, the official projection is still a 7.4 per cent. Declining economic indicators certainly put pressure on the capital market. Trading of share in the market is largely determined by the country’s existing economic indicators.

One can never expect a rise in the share trade as long as the macroeconomic indicators are not favourable. The existing bearish trend   in the Nepalese capital market can be largely attributed to negative performance of economy.  Left unity might be a coincidence for a harrowing fall of the index. However, economic slowdown cannot be set aside.

Market forces should not always be driven by rumours. Investors always make some senses before making investment. Lots of assumptions have been made about the downfall of NEPSE index. But most of them are baseless that ultimately affect the trading of share. Certainly, the announcement of the CPN-UML and CPN- MC merger has dampened the share market to some extent.  

There are lots of reasons why left alliance alone is not responsible for the downfall of the NEPSE index? Firstly, investors know the election manifestoes of these left parties very well. Though UML claims to be the most pragmatic communist party based on the principle of Marxism and Leninist, it has already given up classical dogma of communism. It has openly adopted principles of free-market economy with a strong mechanism to supervise and regulate it. While in power, the UML never went against liberalisation and free market economy.

As far as the CPN- MC is concerned, they seem more flexible about deregulation. Hence, the left unity should not be taken as a threat to the growth of capital market. Certainly, CPN-MC when it was in the government for the first time in 2009 had brought out regulatory framework to govern public institutions. Besides, the then Finance Minister Dr. Baburam Bhattarai was not friendly towards trading of shares. Much change has taken place since then. Both parties have embraced lots of changes at the cost of the principle of communism. It is very interesting to note that second generation leaders of both UML and MC are more open to the liberalisation. 

Undoubtedly, the left alliance has triggered a big tremor in the country’s politics. Politics can never be kept aside. It has been a part of everyday life. However, over-politicisation, baseless assumptions and unnecessary fear can sometimes be counterproductive.  Left alliance might have generated fear psychosis among investors, but it cannot be blamed for the downfall of the market. Everybody should understand that the index in the capital market always tends to move up and down. It’s the nature of the market.

 

Caution

However, concerned authorities regulating the stock market should be proactive in building confidence of investors. Nobody should try to create apprehension about the changes taking place in the country’s politics. Everybody should take the changes positively. Otherwise domino effect of rumor can paralyse the entire capital market. 

 

 

 

 

 

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