Market Watch

Stock market keeps fingers crossed for rebound in new year

Published by Octron on January 2, 2011

Gloom marked the domestic capital market throughout 2010, but a number of policy measures that have been implemented recently may give it a boost in 2011.

Investor confidence sank to the lowest ebb in the year gone by amid political uncertainty. And despite the introduction of regulations governing mutual funds and the central depository service (CDS), the stock market did not rebound as was expected.

The Nepal Stock Exchange (NEPSE) index has been hovering around 400 points presently compared to a high of 1175.38 on Aug. 31, 2008. The NEPSE had plunged to a low of 390.88 points on Dec. 19. “Until the political environment improves, the policy measures taken to improve the capital market will not yield any fruit,” said Surbir Poudel, chairman of the Securities Board of Nepal (SEBON), the regulator of the capital market.

Political differences are widening instead of narrowing, and whether the Constituent Assembly will be able to bring out the constitution by May 28 is uncertain. Investors are concerned what will happen if the constitution is not written by the deadline.

At the same time, the performance of the financial industry in 2011 will be crucial to the revival of the stock market as it accounts for more than 80 percent of the shares listed on NEPSE. Banks and financial institutions were forced to stop credit to investors in shares amid a liquidity crisis, and that also affected the performance of the stock market in 2010. “Investors are also not seeing any benefits in putting money in stock by borrowing at the currently high interest rates,” said Nanda Kishore Mundada, president of the Nepal Stockbrokers Association. “If the liquidity problem in the banking sector eases resulting in a decrease in interest rates, it will give a boost to the capital market,” he added.

SEBON has introduced some essential policy measures including mutual funds and CDS regulations and portfolio management guidelines that have paved the way for non-resident Nepalis (NRNs) to invest in the stock market. The budget for the current fiscal year has vowed to allow NRNs to invest in Nepal. Likewise, the process of establishing the CDS is advancing despite various hassles. NEPSE has recently opened a subsidiary company to run the CDS after attempts to establish a company in partnership with banks and financial institutions failed amid differences over the paid-up capital.

With work progressing to start operation of the CDS and a number of companies initiating homework to establish companies to run mutual funds, an increase in the number of investors can be expected. The CDS will eliminate physical share certificates and manual clearance and settlement thereby speeding stock trading. The dematerialized account in the CDS works as a virtual bank of listed stocks facilitating online transfer of share ownership which will enable investors outside the Valley too to participate in trading.

Poudel said that mutual funds would intervene in the market to correct untoward fluctuations as institutional investors.

Suman Rayamajhi, chief executive officer of Beed Invest, a portfolio management company, said there was an urgent need for additional investors to create demand as there was a glut of shares in the market.

Source: Kantipur

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