The market broke out from its long term support level on October 2009 indicating a major long term down trend - particularly a falling wedge trend analysis chart pattern showing temporary interruption to an upward price rally. Accompanied by low market capitalization, the secondary market is also experiencing supply pressure with an influx of new shares. The oversell position with dwindling turnover is further hitting the already low investor confidence. As the market drops below 502 points, the lowest ever since April 2007, panic stricken investors are seeking an explanation and action plan for the persistent decline the market has been witnessing.
Fundamental analysis cannot rationalize the downtrend, considering corrected PEs, and largely optimistic quarterly results. The dismal performance of the secondary market can instead be attributed to the spillover effect of the macro economic situation- primarily the liquidity crunch.
While the obvious cause is high credit and low deposit growth, the lack of money in the market seems to stem at large from the increasing deposits with co-operatives which have managed to tap the local market. With no regulatory body behind co-operatives there seems to be no evidence to investment whereabouts of the money. As cash is a preferred alternative to avoid taxes and regulation, investing in real estate with cash accompanied by capital flight to dollar accounts abroad has created a situation where the money is not being mobilized within the domestic market. As co-operatives don’t have a KYC process to accept deposits, the money from informal channels is getting deposited in their high interest bearing accounts.
At the same time, despite the increase in remittances, the expansion in trade deficit by 48.9% and decrease in foreign grants by 10.2% in the first 4 months of FY 2009/10 has cause a balance of payment deficit of 20.49 billion. This combined with the capital flight of billions of rupees has added to the reduction in foreign exchange primarily U.S dollars, which does not allow for an expansionary monetary policy to be implemented to curb the problem.
Furthermore, NRB’s issued guidelines to control the loan to deposit ratio has created an interest rate battle among financial institutions to acquire more deposits, and reduce loans. With increase in interest rates of banks in contrast to stock dividend yields, bank deposits are becoming the preferred alternative at this point of time.
The prevalent economic backdrop and a long-running political instability in the country have failed to create an investment friendly environment. With no real time date on economic indicators, economist and experts rely on information that is at most four months old. There is also fear that Nepal Rastra Bank’s directives on converting 19 percent of promoter shares into general shares will further aggravate supply pressure in the secondary market.
But all is not lost. Once a new governor is appointed, new monetary measures should be adopted which should abate the situation.
Attempt is being made to clamp down on gold imports by allowing issuance of letter of credit (LC) only against 40 percent cash margin, and barring financial institutions from issuing loans to importers to manage the cash margin required for issuing LC for importing gold. The monitoring of saving and credit co-operatives and their realty loans exposure is also on track. Meanwhile, the realty sector is likely to take a hit with the imposition of cap on banks and