Nepal's Stock Market Matures as Investors Shift Towards Value and Stability

The Nepalese capital market is currently undergoing a significant transformation in investor behavior, signaling a crucial step towards greater maturity. Historically, many investors were drawn to companies with low paid-up capital, limited supply, or recent listings, often seeking quick gains. However, a discernible shift is now underway, with a growing number of investors redirecting their focus towards fundamentally strong and well-established companies. This evolving investment paradigm is widely seen by market participants as an indicator of the market's increasing sophistication and resilience.

This positive sentiment has been particularly evident since the beginning of the current fiscal year. The NEPSE index, which closed at 2577.24 points on the last trading day of the previous fiscal year, has demonstrated robust growth, reaching 2684.33 points by July 18th (Ashad 18th in Nepali calendar). This represents an impressive gain of 107.09 points, or 4.16%, within just eleven trading days, injecting optimism into the market.

A key driver of this shift is the renewed attraction towards the banking sector, which had remained relatively subdued for an extended period. Among the twelve sub-groups actively traded on NEPSE, ten have shown improvement, with the banking sector leading the charge, recording a substantial 6.70% increase. This growing preference for banks, which constitute a significant portion of the NEPSE index, is interpreted by investors as a strong signal of market maturation. Investors are increasingly favoring commercial banks that offer attractive dividend capacities and exhibit lower risk profiles, making them valuable additions to their portfolios.

Lalit Dhungana, a seasoned investor, highlighted the rationale behind this trend. “This is the period when banks release their financial statements for the last fiscal year. Many banks are anticipated to distribute dividends ranging from 10% to 15%,” he explained to Merolagani. Dhungana further elaborated that “an increase in bank share prices contributes to the stability of the NEPSE index and reduces overall market risk, which is why investors are gravitating towards the banking sector.” Beyond banking, the hydropower sector continues to be a perennial favorite among investors, registering a healthy 4.57% improvement.

While ten sub-groups have shown positive momentum, the Manufacturing & Processing and Investment sectors have experienced some declines. The Manufacturing & Processing sector saw the most significant drop, falling by 4.31%, while the Investment sector recorded a modest decrease of 0.34%. Conversely, other sectors like Development Banks (+4.74%), Finance (+2.54%), and Trading (+2.36%) have also posted gains. Gradual improvements are also visible across Non-Life Insurance, Microfinance, and Life Insurance groups, collectively indicating that the broader market is steadily regaining its rhythm. This suggests a broader investor preference for value and stability over purely growth-driven speculative plays.

The current market upswing is significantly bolstered by the proactive and flexible policies adopted by the Nepal Rastra Bank (NRB). The central bank's provision allowing up to 80% loan-to-value (LTV) for share-backed loans (margin lending), based on either the average closing price of the last 180 trading days or the prevailing market price (whichever is lower), has provided substantial relief to investors. This policy, coupled with relatively low-interest rates, has created a more conducive environment for capital deployment in the stock market, particularly encouraging investment in affordable and robust shares.

Furthermore, the Securities Board of Nepal (SEBON) is actively working towards modernizing the market. SEBON has prepared concept papers for introducing advanced trading mechanisms such as short-selling and intra-day trading. The regulatory body is also preparing to diversify the existing cash-based trading system by introducing new instruments like margin trading, securities lending, and covered short-selling. These impending reforms have been met with enthusiasm by secondary market investors, who anticipate enhanced liquidity and trading opportunities.

The introduction of short-selling, in particular, will offer investors the ability to profit even when share prices decline. SEBON plans to implement these new provisions in a secure and structured three-phase approach, strictly prohibiting naked short-selling (selling shares not owned). Once these new mechanisms are fully operational, the market is expected to experience increased liquidity, with trading likely to concentrate on large-capitalization companies. This is because short-selling and intra-day trading will not be permitted for all companies; rather, they will be restricted to those with sufficient liquidity and significant institutional investor participation.

The collaborative efforts of the government, Nepal Rastra Bank, and SEBON in fostering market improvement are highly commendable. Investors emphasize the importance of encouraging institutional investors even before the full implementation of intra-day and short-selling mechanisms. As investor Lalit Dhungana suggests, a stronger presence of institutional investors will help mitigate the influence of small-scale speculators, thereby bringing greater stability to the market.

In conclusion, the Nepalese stock market is on a trajectory towards a new era, driven by the financial health and dividend certainty of large corporations, coupled with the forward-thinking regulatory initiatives. The shift in investment preference from small, low-supply companies to larger, more liquid entities is a clear indication of a market evolving to become more secure, professional, and attractive for both domestic and international investors.