Why is Nepal's Stock Market Rising Recently? A Confluence of Factors Ignites Investor Optimism

Nepal's stock market has witnessed a remarkable surge in recent times, bolstered by a multitude of influential factors that have ignited a wave of optimism among investors. A combination of low-interest rates, the influx of new broker companies, improved liquidity in BFIs, a favorable Credit Deposit (CD) Ratio, reduced spread rates, a significant upsurge in remittance inflows, and the government's fiscal year-end expenditure push has contributed to the market's impressive performance.

Low-interest rates have played a pivotal role in propelling Nepal's stock market forward. With borrowing costs reduced, investors are enticed to seek higher returns through equity investments, thereby driving up demand for stocks. This shift in investment preferences has provided a boost to the stock market as investors seek more lucrative avenues. Here's how low-interest rates can impact the stock market:

Attractive Investment Alternative: When interest rates are low, fixed-income investments such as bonds and savings accounts offer relatively lower returns. As a result, investors may be more inclined to seek higher returns by investing in stocks, which can drive up demand and push stock prices higher.

Lower Borrowing Costs: Low-interest rates can reduce the cost of borrowing for companies and individuals. When borrowing costs are low, businesses can access capital more easily and at lower expenses, allowing them to expand their operations, invest in new projects, and potentially increase profits. This positive outlook can contribute to a rising stock market.

Increased Consumer Spending: Low-interest rates can incentivise consumers to borrow and spend more, as it becomes cheaper to finance purchases through loans or credit. This increased consumer spending can benefit companies and industries, leading to improved corporate earnings and, in turn, higher stock prices.

Asset Allocation: When interest rates are low, investors may reevaluate their asset allocation strategies. They may allocate a larger portion of their portfolio towards stocks, which have the potential for higher returns in a low-interest-rate environment.

It's important to note that the stock market is influenced by multiple factors, and low-interest rates are just one piece of the puzzle. Economic conditions, geopolitical events, market sentiment, and other factors can also have significant impacts on stock market movements.

Anticipated reductions in spread rates, with the Nepal Bankers' Association (NBA) projecting a decrease to 4 percent by the end of Ashad, have generated enthusiasm among investors. Lower spread rates lead to decreased loan interest rates and deposit interest rates, stimulating borrowing and consumption. This augurs well for businesses, supporting their profitability and potentially translating into higher stock prices.

The recent issuance of licenses to new broker companies by the Securities Board of Nepal (SEBON) has also had a positive impact on the market. The increased presence of broker companies enhances market participation, fosters competition, and promotes innovation in services and trading platforms. This development has expanded investment opportunities, attracting more investors and contributing to the market's upward trajectory. Here's how the expansion of broker companies can impact the stock market:

Increased Market Participation: With more broker companies operating in the market, there is likely to be an increase in market participation from both individual and institutional investors. This can lead to higher trading volumes and liquidity in the stock market, which can contribute to price appreciation.

Improved Market Efficiency: The presence of more broker companies can enhance market efficiency by providing greater access to market information, research, and analysis. This can attract more investors and improve overall market transparency, leading to more accurate pricing of securities.

Competition and Innovation: Increased competition among broker companies can drive innovation in services, technology, and trading platforms. This can result in improved investor experiences, better execution of trades, and the introduction of new investment products or strategies. Such developments can attract more investors and contribute to market growth.

Diversification of Investor Base: The entry of new broker companies can help diversify the investor base by targeting different customer segments, including retail investors, high-net-worth individuals, and institutional investors. This diversification can bring in fresh capital and increase demand for stocks, potentially leading to a rise in stock prices.

It's worth noting that while the expansion of broker companies can have positive effects on the stock market, it is also essential to maintain appropriate regulatory oversight to ensure market integrity, investor protection, and fair practices within the industry.

Improved liquidity in BFIs, alongside a favorable Credit to Deposit (CD) Ratio of 84.01 percent, has further propelled the stock market's rise. The robust liquidity position allows BFIs to extend credit, facilitating business expansion, investment, and economic growth. This positive economic outlook fuels investor sentiment, instilling confidence in the stock market and driving stock prices higher.

Improved Liquidity in BFIs: When BFIs have sufficient liquidity, they are better positioned to extend credit to businesses and individuals. This increased lending capacity can stimulate economic activities, support business growth, and potentially lead to higher corporate earnings. As a result, investors may perceive the stock market as an attractive investment avenue, leading to a rise in stock prices.

Favorable Credit to Deposit (CD) Ratio: A CD ratio of 84.01 percent indicates that BFIs have a relatively higher proportion of deposits available for lending purposes. This implies that BFIs have the potential to expand their loan portfolio, which can drive economic growth and investment opportunities. This positive outlook can attract investors to the stock market, contributing to a rise in stock prices.

Furthermore, an impressive upsurge of 23.4% in remittance inflows based on ten months' data ending mid-May 2022/23 has provided a significant impetus to the stock market. Remittances contribute to increased consumer spending, improved economic growth, and higher savings and investments. These factors bolster the overall market sentiment and attract investors seeking opportunities for capital growth. Here's how increased remittance can impact the stock market:

Increased Consumption and Demand: Higher remittance inflows mean more disposable income for households. This increased purchasing power can lead to higher consumer spending, stimulating demand for goods and services. Companies operating in sectors such as retail, consumer goods, and services may experience increased sales and revenue, potentially driving up their stock prices.

Improved Economic Growth: Remittances contribute significantly to Nepal's economy, accounting for a significant portion of its GDP. The increased inflow of remittances can support economic growth by providing funds for investment, job creation, and overall economic development. Improved economic performance can positively impact the stock market, attracting investors and boosting investor sentiment.

Increased Savings and Investments: Remittances can also contribute to increased savings and investments. Nepalese individuals and households receiving remittances may allocate a portion of these funds toward savings or investments. This increased investment activity can result in higher demand for financial instruments, including stocks, potentially driving stock prices higher.

Strengthening Currency: Higher remittance inflows can lead to increased foreign exchange reserves, which can help stabilize the Nepalese currency. A stronger currency can have positive implications for the stock market, attracting foreign investors and increasing their purchasing power in the local market.

It's important to consider that these factors are part of a complex interplay of market dynamics, and multiple other factors can also influence the stock market. Investors' sentiment, global economic trends, political stability, and market regulations are some additional factors that can impact stock market movements.

At the same time, as the fiscal year approaches its end, the government's promotion of massive expenditure in Jestha and Asadh creates new deposits in the banking system, injecting liquidity into the economy. This influx of funds stimulates economic activities and has a positive effect on the stock market, reinforcing the upward momentum.

Investors typically exhibit optimism at the end of the fiscal year, even before the announcement of Q4 reports. This anticipation arises from expectations of robust financial performance by companies, prompting investors to strategically position themselves for potential gains following the report's release.

Moreover, considering the historical market cycles, Q4 has traditionally been a month of noteworthy performance in the NEPSE. Companies endeavor to present stronger financial statements to maintain cash and cash equivalents. This emphasis on portraying solid financials often leads to a market rally, driving up stock prices as companies divest their shares.

In conclusion, these combined elements have created a favorable environment for the stock market, attracting investors and driving stock prices higher. However, it is crucial to remain vigilant and monitor the market's evolution, as various factors can influence its trajectory in the future.

Authored by Praisha Shrestha