Exploring the causes of 3 booms and burst of NEPSE index since 1997

-Krishna Khatiwada

NEPSE has witnessed three bull markets and subsequently—three bursts since its inception. The chart below shows the journey of NEPSE index from 1997 to the end of 2016. Three major booms and bursts of NEPSE index were on the year 2000, 2008 and 2016.

In this article, we will discuss the economic and political situations of the country during the bulls of NEPSE index. Primarly, we will focus on the discussion that if the economic condition of a country supports the bull market, then that bull market may be sustained. But a declining economy with a growing bull market can be very dangerous.

Causes of 2000 NEPSE index burst

NEPSE’s bull market gained pace from 1999 and had three folded in the period of around two and half years, and reached a high of 545.82 on 23^rd November, 2000. Then it took only one and half years to reach the low of 186.22 points and from that lowest point, NEPSE index took another 5 years to cross that level of 545.82 points.

From 1994 to 1999, the GDP growth rate was amazing and on average, the GDP had grown by 6%. But in 2000, the GDP growth had reduced to 4.80% followed by further deteriorating GDP growth of 0.10% in 2001. 

The economy of Nepal is an agricultural & service sector dominant economy and GDP largely depends on the agriculture production (contribution of service sector to the economy remains somehow constant). Due to the lack of modernized irrigation facility in the country, the productivity of the agriculture sector largely depends on weather conditions.  Drought and unfavorable weather at that time didn’t support agricultural sector which resulted in low productivity.

Apart from low agricultural productivity, civil war was also one of the main problems the country had been facing at that time.  Civil war had resulted in killing and occupying public property unlawfully and that had changed government’s focus from the development of the country to the protection of citizens. Disturbed political situation creates insecurity in industries sectors including tourism industry, as a result of which the production in all these sectors had decreased and that had caused GDP growth to fall abruptly. The unstable political and economic situation discouraged investors to enter into the stock market. At that time, people were concerned about saving their wealth and were less concerned about growing it. The unstable political and economic situation discouraged investors for further investments in stock market.

GDP to Investment had decreased from 22.40% in 2000 to 18.40% in 2001. The sound national savings shows potential for investment and GDP/investment % has direct relation to the stock market. The civil war was the main reason for the NEPSE burst in 2000.

Exploring Economic and political situation of the country in 2008 burst

Nepal’s 10 years long internal conflict had ended on 2006 and the introduction of structural three-year budget plan built positivity among the investors.  The country’s development had been left handicapped during the period of civil war and the new budget plan had finally given development of the country as one of the key priorities.  As you can see in the graph below, the uptrend from 2006 had increased with pace. At that time, the political situation was somehow stable compared to prior years of terror and civl war, though the introduction of new constitution after the Nepal’s democracy was pending and the problem of frequently changing government was also there.

During the period of civil war, large number of people migrated to cities from rural parts.

Those migrated people started owning property in Kathmandu and other major cities. High demand for lands, buildings and properties had increased real estate rates unexpectedly.  The banks also used to encourage real estate brokers and general public to take loans from them and gave huge credit without researching individual sources of income effectively. As a result, the cases of loan defaults had increased and banks’ liquid asset had changed to non-banking physical assets. At that time, there was a huge demand for the loans that had also raised bank’s interest rates.

As a result of defaulters and high credit rate, liquidity in the bank had decreased.

Investment opportunity is limited in Nepal, thus the investment capital usually revolves around the three major sectors i.e. stock market, real estate and fixed deposit. The flow of capital was on the real estate sector at that time.

The increased real estate rate had degraded the charm of stock market for both institutional and retail investors and that resulted in the declining of the NEPSE index.

The economy was looking fine at that time but high demand for real estate sector played a vital role for 2008 NEPSE index burst. GDP growth in 2007 was 6.10%, 4.50% in 2008 and 4.80% in 2009.

After that, NEPSE index took four more years to return to the uptrend and six years to cross the high of 1,175.38 points. National savings and investment/ GDP ratio plays the important role on the progression of the country’s capital market index.

Exploring the causes of Boom and Burst of 2015-2016.

The real estate charm in the country had decreased post-earthquake of 2015.  People didn’t want to own luxurious things. This had decreased the loan demands and as a result, loan rates had decreased. The low loan rate was followed by low fixed deposit rate and that makes both banking and real estate sector unattractive for the investor. So the capital started flowing in the stock market which took NEPSE to an all-time high of 1,881 points.

At that time, public invested in stock market by taking loans from the bank because the return from the capital market was much more than the bank’s loan rates.  

The earthquake was followed by the border blockade and the productivity of the country had collapsed which was well expressed by the GDP growth of 0.40% in 2015 but still the index was booming. Low GDP growth signifies low demand in the country.

In 2016, the GDP had grown by 6.90%, highest recorded growth in the last 2 decades and country’s political and economic situation was well stabilized.  At the same time, many new financial institutions had been introduced especially non-life and life insurance (post-earthquake). Expanding BFIs made the sector very competitive and to attract customers, the deposit rates had started soaring. The increased deposit rates raised the loan rates and the high loan rates discouraged investors to invest in stock market with borrowed money. The return from banking sector was comparable to the return from the stock market and that attracted institutional investors to invest in banks as that provides larger margin of safety. The country’s capital had distributed to the large number of financial institution and distributed capital among the small numerous financials (microfinance, co-operatives) had impacted on the liquidity of larger commercial banks.  After that, government also took many measures to decrease the BFIs in the country. This entire factor turned market from the Bull to bear in 2016. The soaring interest rates and low liquidity were the main reason for the NEPSE burst in 2016.

The bull market of 2000 and 2016 went on the highest on declining country’s economy.

Exploring chart pattern of NEPSE index

The NEPSE index took 8 years to reach new high at last two cases. NEPSE reached highest point on the year 2000, then on the year 2008, and last on the year 2016. If NEPSE follows this pattern, we could see next high on 2024. The longest bearish trend was of 2008 which lasted for 4 years and the shortest was of 2000 which had lasted for the 1.5 years. As you can see in the chart above, whenever NEPSE crosses the previous high level, its growth speed had increased rapidly.

From this pattern, we can say that, it takes very long time to create positivity among investors in stock market.

Conclusion:

1. If the country’s macroeconomic indicator doesn’t support the bull market, then that market will be less durable.
2. Bull market supported by high bank liquidity will be strong.
3. For the stock market to flourish, banking rates should be lower than the average return of the NEPSE index.
4. The political stability and secure economic situation is the key for the stock market boom.

We are currently in a bearish market and we know that there are many challenges for NEPSE right now, but definitely the index will outperform those challenges and bring the beautiful bull market in upcoming years.

(The GDP at the producer price has been used in the article).