Report looks at factors affecting share prices

KATHMANDU:

Stock prices rise in tandem with the hike in consumer prices and money supply, and fall whenever bank interest rates go up or banking sector regulator tightens rules on margin lending, a latest study conducted by officials of Nepal Rastra Bank (NRB) has found.

The researchers had reached this conclusion after analysing the trend at the Nepal Stock Exchange (Nepse) from August 2000 to July 2014.

“The Nepse index has strong positive relationship with inflation and money supply, and negative correlation with interest rate. This shows people have gradually started using stocks as a hedge against inflation when ample liquidity is available at low interest rate — an indication that the domestic stock market is quite responsive to macroeconomic condition,” says a working paper titled, ‘Empirical Examination of Determinants of Stock Index in Nepal’, prepared by Prakash Kumar Shrestha and Biggyan Raj Subedi, director and deputy director at NRB.

The study also found that Nepse index is influenced by political developments and NRB’s policy on margin lending.

This implies positive political outlook causes share prices to go up, while NRB’s measures aimed at discouraging banks and financial institutions from extending loans on the back of shares tend to bring down share prices.

Referring to these findings, the authors of the working paper have said that share investors tend to watch political developments closely. “Hence, positive political development and political stability can promote share market which can play a vital role in deepening financial intermediation and resource mobilisation,” says the working paper.

Also, NRB’s policy on lending against stocks has been effective in influencing share market, which shows the power that NRB can wield on the stock market.

The history of stock trading in the country can be traced back to 1983, when the Securities Exchange Centre was established. The government, in 1993, converted the centre into Nepse, which formally opened its trading floor in January 1994. Nepse so far is the only stock

exchange in the country.

Despite its short life span, Nepse has witnessed rollercoaster movements over the years. On August 31, 2008, the index reached its all-time high of 1,175 points before plunging to a record low of 292 points on June 15, 2011.

Since the second Constituent Assembly elections in November last year, the stock index has once again started moving up, while undergoing some minor corrections.

“Worldwide, stock prices are affected by macroeconomic factors, social or political events, market sentiments or expectations about economic growth prospects, monetary and fiscal policy announcements, among others,” says the working paper, adding, “Stock prices are also influenced by rumours, news and speculations.” This is also true in the case of Nepal.

“Authorities, therefore, should try to raise transparency in the share market by ensuring easy access to information on various companies. Concerned authorities should also be proactive in clarifying gossips and rumours that spread in the market,” says the working paper.

Major findings

• Nepse index has strong positive relationship with inflation and money supply

• Benchmark index has negative correlation with interest rate

• Domestic stock market quite responsive to macroeconomic condition

• Nepse index influenced by political developments and NRB’s policy on margin lending

Source: THT