May 17: The history of the share market in Nepal is relatively short compared to other countries. The Nepal Stock Exchange (NEPSE) was established in 1993 as the country's only stock exchange. As the only stock exchange company, the Nepal Stock Exchange (NEPSE), formally opened its trading floor on13th January 1994. 

 Initially, NEPSE had only 37 listed companies, and trading was conducted manually using an open outcry system. However, in recent years, NEPSE has modernized its trading platform, and as of 2023, there are around 269 listed companies.

 Recent data at the Central Depository Services and Clearing Limited (CDSC) show that the number of Demat account holders in Nepal has surpassed 5 million. 

Despite its short history, the Nepalese stock market has seen its fair share of ups and downs. NEPSE has witnessed four bull markets and subsequently—four bear markets since its inception. The NEPSE Index witnessed four major booms and crashes in the years 2000, 2008,  2016  and 2021. 

This article will explore the timeline of bullish and bearish trends in the NEPSE Index, analyzing the underlying economic and political causes that drove these fluctuations.

Reasons behind the 2000 NEPSE Index crash 
The Nepal Stock Exchange (NEPSE) index gained bull run pace from 1999 which tripled in around two and half years, and reached a high of 545.82 on November 23, 2000.

However, within a short period of one and a half years, the NEPSE index crashed to a low of 186.22 points, and it took another five years for the index to surpass its previous high of 545.82 points.

One of the main reasons behind the 2000 NEPSE index burst was the declining GDP growth rate. From 1994 to 1999, the GDP growth rate was impressive, averaging at 6%. However, in 2000, the GDP growth rate dropped to 4.80% followed by a further decline to 0.10% in 2001.

The agricultural sector, which is a significant contributor to Nepal's GDP, suffered from low productivity due to drought and unfavorable weather conditions, as the country lacked modernized irrigation facilities.

In addition to low agricultural productivity, the country was also facing a civil war which resulted in the killing and unlawful occupation of public property. The government was forced to shift its focus from development to protection of citizens, which resulted in a lack of political stability and security in various sectors, including tourism.

As a result, production in all these sectors decreased, causing a sharp decline in GDP growth and discouraging investors from entering the stock market.

The civil war was one of the main reasons behind the NEPSE burst in 2000, creating an unstable political and economic environment that discouraged investors from further investing in the stock market. People were more concerned about saving their wealth rather than growing it, leading to a decline in market participatio.

 Examining the reasons for the NEPSE's crash in 2008 
The end of Nepal's 10-year internal conflict in 2006 brought a sense of optimism among investors, especially with the introduction of a three-year budget plan focused on the country's development.

The uptrend from 2006 continued to gain pace until the index touched the high of 1175 in August 2008, as the political situation remained relatively stable, despite the problem of changing governments and the pending introduction of a new constitution.

During the conflict period, many people migrated to cities from rural areas and started buying properties, leading to an unexpected increase in real estate rates. Banks encouraged real estate brokers and the public to take out loans, leading to a surge in cases of loan defaults, and the banks' liquid assets were converted into non-banking physical assets.

The demand for loans raised interest rates and reduced liquidity in banks. Interest rate and share market always have inverse relationship. When interest rates rise, sharemarket falls, and vice-versa. Investors exited from the sharemarket and parked their cash in the fixed deposits, causing the NEPSE index to plunge.  

As investment opportunities in Nepal are limited, the investment capital mainly revolves around three major sectors: stock market, real estate, and fixed deposit. The flow of capital was directed towards the real estate sector, leading to a decline in the charm of the stock market for both institutional and retail investors, resulting in a decline in the NEPSE index.

In 2007, the GDP growth rate was 6.10%, followed by a decrease to 4.50% in 2008 and 4.80% in 2009. The NEPSE index burst in 2008 was mainly due to the high demand for the real estate sector and soaring interest rates, which degraded the attraction of the stock market.

After the burst, it took four years for the NEPSE index to return to an uptrend, and six years to cross the high of 1,175.38 points. 
          Underlying causes behind boom and burst of 2015-2016
In 2015-2016, Nepal faced a series of events that caused both boom and burst in the country's capital market. The earthquake of 2015 had a significant impact on the real estate sector, as people were not interested in owning luxury items and the demand for loans decreased.

This led to lower loan rates and subsequently, lower fixed deposit rates, making both banking and real estate sectors unattractive for investors. Consequently, capital started flowing into the stock market, and NEPSE reached a high of 1,881 points in July 2016. 

During this period, the public invested in the stock market by taking loans from banks because the return on investment in the capital market was much higher than the bank's loan rates.

However, the productivity of the country collapsed due to the border blockade, and the GDP growth was only 0.40% in 2015, despite the booming stock market. The low GDP growth indicated low demand in the country.

In 2016, the GDP growth rebounded, recording a growth rate of 6.90%, the highest recorded growth in the last two decades. The political and economic situation in the country stabilized, and many new financial institutions were introduced, especially non-life and life insurance after the earthquake.

This made the financial sector highly competitive, and to attract customers, the deposit rates started soaring, which raised the loan rates.

The high loan rates discouraged investors from borrowing to invest in the stock market, and the return from the banking sector became comparable to the return from the stock market. This attracted institutional investors to invest in banks, as it provided a larger margin of safety.

The capital was distributed among numerous small financials, such as microfinance and cooperatives, which impacted the liquidity of larger commercial banks. The government formed National Reconstruction Authority and expedited the reconstruction work using up huge budget to reconstruct infrastructures and individual houses destroyed by the earthquake. This led to the liquidity crisis in the banks and financial institutions, driving the loan rates high. 

The government also took measures to decrease the number of financial institutions in the country, which turned the market from the Bull to Bear in 2016. The soaring interest rates and liquidity crunch were the main reasons for the NEPSE burst in 2016. 

Exploring causes of bull and bear of 2021 

Capital market of Nepal started gaining momentum again in early 2020 and went on a bullish trend until it touched an all-time high of 3200 in the month of August 2021. Several factors played a role in pushing the NEPSE Index on a bullish trajectory.

The COVID-19 pandemic hit the world and Nepal, and the government imposed lockdowns and restricted people's movement, leading to the shutdowns of most businesses and economic activities. This made people search for alternative ways to make money, and many new investors poured their money into the stock market. 

Additionally, the lockdowns brought development works to a grinding halt, and the price of petroleum products dwindled, reducing the cost of goods and commodities. The import of goods and commodities except daily essentials was also banned.

Banks and financial institutions witnessed excessive liquidity for lack of loan demand, and they started flowing margin loans to investors at as low as 7 percent interest.

However, the boom in the stock market did not last long. Various factors led to the sharp fall of the stock market, driving it down to the bearish mood. 

The Nepal Rastra Bank (NRB) tightened its monetary policy, and all banks and financial institutions were also placed under strict restrictions, effectively banning them from share trading. The NRB's austere policies caused the market correction by dislodging the confidence of large and institutionalized share traders. 

In the fiscal year 2078/79, Nepal Rastra Bank (NRB) had tightened loans against shares by introducing the credit limit of NPR 40/120 million. The central bank's policy of NPR 40/120 million credit threshold against the shares had put the share market in crisis, causing the NEPSE index to plunge. 

Moreover, the Nepalese economy experienced a significant slowdown due to the pandemic, which affected the performance of many companies listed on the stock exchange. A liquidity crunch in the banking sector, coupled with tighter monetary policies, affected investor confidence in the market. 

Inflation in Nepal has been rising since the world removed lockdowns and opened borders for import and export, eroding the purchasing power of investors and making them less willing to invest in the stock market. The Russia’s war on Ukraine has added to the woes of the customers, driving up the prices of daily essentials and petroleum products. 

The price of petroleum products surged rapidly after the pandemic, driving prices of almost everything up, lowering the investors' capacity to invest in the stock market and other areas. 

Interest rates also surged up to 19/20percent from 7/8 percent, and stock and interest rate have a negative correlation. As interest rates rose sharply, investors and people parked their money in fixed deposits because of margin of safety.

 The bullish trend in the Nepalese stock market in 2021 was mainly driven by the pandemic-induced market disruptions, which led to excess liquidity and low-interest rates. However, the NRB's policies, the economic slowdown, the liquidity crunch, inflation, and rising interest rates led to the bearish trend in the market, causing a significant correction in the NEPSE Index.  

In summary, the NEPSE Index has had a tumultuous history since its inception, with several downs and ups, reaching its highest points in 2000, 2008, 2016, and 2021. The NEPSE Index started at 157 points in 1998 and climbed to a high of 545 points in 2000, followed by a bearish period that lasted until 2004. 

The index then gained momentum again, reaching a high of 1175 points in 2008 before tumbling to a low of 298 points in 2012. From 2016 to 2019, the market underwent significant corrections and hit a low of 1104 points in 2019. 

However, from early 2020, the NEPSE Index entered a bullish trend and reached an all-time high of around 3200 points in August 2021, However, the market sentiment turned bearish soon after, and the index has touched lows of around 1800.

Over the past year, the NEPSE index has been fluctuating between 1800 and 2250, with the current state of the secondary market platform hovering between 1800 and 1900.

Unfortunately, the turnover amount on the NEPSE has significantly decreased, currently standing at below NPR 1 billion, a stark contrast from the NPR 21 billion turnover witnessed when the market hit its all-time high.

As a result, market participation has dwindled, and investors have become more passive in light of the secondary market's bearish mood.

The current state of the market is challenging for investors, who are feeling hopeless and psychologically down. To overcome the current bearish sentiment, several challenges and obstacles need to be addressed.

The market-friendly monetary policy of the Nepal Rastra Bank, state of liquidity, interest rates, economic growth, and political situation all play a crucial role in determining the course of the stock market. 

The sooner the NRB comes up with market-friendly policies, the faster interest rates fall, and economic growth increases, the sooner we will see another bull market in the NEPSE.

As they say, "there is light at the end of the tunnel," and NEPSE will surely overcome all the challenges and hindrances to break the previous all-time high and make another record.

Till then, investors have no choice but to manage their risk and wait patiently. The stock market is unpredictable, and it is important to keep a long-term perspective while investing and not panic during short-term fluctuations.