NEPSE’s Dance on the Rhythm of Margin Lending

 Article By :Astitwa Sharma 

In the Nepalese stock market (NEPSE), many retail investors often feel frustrated when prices don’t behave as anticipated. Despite optimism, the reality is that prices are heavily influenced by both industry trends and underlying fundamentals. Let’s break down the main reasons why stock prices in NEPSE are not aligning with expectations.

A) Weak Industry Tailwinds

1. No Industry Has recent Strong Momentum
   In global markets, industries often rise when there is a strong “tailwind” – a positive factor driving growth, such as new technologies, favorable government policies, or surging demand. Unfortunately, in Nepal, no major industry is currently experiencing such a tailwind. Sectors like hydropower, banking, insurance, and manufacturing are either under regulatory pressure, facing slow demand, or struggling with cost inefficiencies. It would take a few quarters for even the regulatory adjustment to manifest results.

2. Without Strong Industries, Strong Companies are having difficulty to Perform
   Even fundamentally good companies struggle to perform when their industry as a whole lacks growth drivers. This means that, despite investor enthusiasm, stock prices have little support for sustainable upward momentum. Without sector-wide growth, company performance remains muted, dragging investor sentiment along with it.

B) The Role of Margin Lending and Liquidity

Another major factor influencing NEPSE’s price movement is margin lending.

• Liquidity Boost from Margin Lending
  The increase in margin lending has provided additional liquidity in the market. This injection of money has indeed fueled upward trend of stock prices temporarily. This has very precisely defined the market conditions lately; no more sectorial moves rather there are seasonal moves which are often not sustainable.

• The Sustainability Challenge
   The sustainability of such price increases is questionable. At the end of the day, stock valuations reflect the company’s business performance. As the saying goes, “Prices are the slaves of Earnings.” If earnings do not grow, prices inflated by margin lending will eventually collapse, leaving retail investors more disappointed.

C) Excess Liquidity in the Banking System

·        Low Interest Rates Driving Margin Lending
A major reason margin lending has surged is the excess liquidity in the Nepali banking system. With banks having good funds and limited avenues for lending, interest rates on loans (including margin loans) have dropped significantly.

·        Impact on Stock Market
This cheap credit has encouraged investors to borrow more aggressively for stock trading. While it initially pushes stock prices upward, it also creates a bubble-like situation. If economic conditions tighten and interest rates rise again, investors relying heavily on margin loans may face forced selling, which can quickly drag prices down.

D) Liquidity-Driven Bulls and Bears in NEPSE

• The Indispensability Illusion with Data
  Historically, NEPSE has witnessed cycles where excess liquidity created massive rallies. For example:

  • In 2008, NEPSE touched ~1175 points before collapsing to ~292 points by 2009 when liquidity dried up.

  • In 2016, NEPSE surged past 1880 points, largely on liquidity-driven optimism, but crashed below 1200 within a year.

  • The most notable cycle was in 2021, when excess liquidity, margin lending, and low interest rates pushed NEPSE to its all-time high of 3227 points, before it corrected sharply to below 1900 points by 2022.

• Pattern of Overconfidence
  Each cycle gave investors a sense of indispensability, where they felt their presence in the market was essential. But in reality, these rallies were fueled more by liquidity than company’s growth. When liquidity tightened, forced selling triggered steep corrections.

• Lesson from History
  These statistics prove a consistent theme: NEPSE’s strongest rallies have been liquidity-driven, but the crashes have always reminded investors that without earnings growth, prices cannot sustain.

E) NEPSE’s Failure to Cross All-Time Highs: Weak Fundamentals Behind Rising Prices

Despite temporary rallies, NEPSE has struggled to move sustainably beyond its all-time high of 3227 points.The reason lies in weak fundamentals: stock prices may rise due to liquidity, but the underlying companies have not shown proportional growth in earnings, dividends, or sector-wide profitability.Retail investors often chase momentum, but without strong financial results backing up valuations, the market eventually fails to break higher levels and instead reverses.This has created a cycle of short-term rallies followed by long-term stagnation, frustrating retail investors who expect continuous growth. 

F) Policy-Driven Rallies: Paid-Up Capital Expansion

The NRB directive (2015–2017) requiring banks to increase their minimum paid-up capital created a historic rally followed by similar decision by then Beema Samiti (now Beema Pradhikaran) of increasing the paid up capital of companies under its regulations. Stocks surged due to capital expansion, rights issues, and mergers, not earnings.Once the cycle ended, corrections followed — proving again that policy-driven rallies are short-term without fundamentals.

G) Unsustainable Earnings and Insider-Driven Price Inflations

·        Temporary Earnings Manipulation
In rising markets, many companies treat the rally as a temporary opportunity to boost their financials by showing unsustainable non-core business earnings — such as profits from one-off transactions, revaluation gains, or asset disposals. This artificially inflates their EPS (Earnings Per Share) and DPS (Dividend Per Share).

·        Creating the “Gold Rush” Effect
These inflated figures attract retail investors chasing quick returns, fueling demand and pushing prices even higher.

·        Insiders Taking Advantage
Meanwhile, industry insiders — often within the regulatory boundaries set by SEBON — use these inflated valuations to exit at high prices.

·        The Aftermath
Once the non-core earnings disappear, EPS and DPS return to normal levels, leaving investors stuck with overpriced stocks and unsustainable valuations.

Stock prices in NEPSE often don’t behave as expected because industries lack growth tailwinds and company fundamentals are not improving at the pace investors are pouring money. While margin lending has temporarily lifted prices by providing liquidity, true and lasting growth in the market depends on earnings. Until industries and companies show strong, consistent performance, investors must remain cautious and realistic in their expectations.

The reminder for investors is clear: liquidity creates rallies, but earnings sustain them.


                                                             The Silver Lining in NEPSE

While NEPSE has seen its fair share of chaos driven by liquidity, policy shocks, and unsustainable rallies, the long-term outlook carries positive possibilities. Some key silver linings include:

·       Diversification of Industries in NEPSE

For too long, NEPSE has been heavily concentrated in banking and financial institutions (BFIs).The entrance of new companies from diverse sectors such as hydropower, pharma, manufacturing, agribusiness, tourism, and healthcare will help the stock market reflect the true structure of Nepal’s economy.This will not only reduce over-dependence on BFIs but also create better sectoral balance in the index.

·       Entrepreneurial Motivation for Genuine Valuations

As more companies enter NEPSE, entrepreneurs will be motivated to work harder to achieve the right valuation for their businesses. Globally, this is a common practice — companies continuously strive to improve earnings, governance, and transparency to justify their market capitalization. In the long run, this shift could transform NEPSE into a platform where value is based more on performance than liquidity.

·       Improved Investor Sophistication

With more industries listed, investors will gain opportunities to diversify their portfolios. Over time, this will encourage a more research-driven investment culture, moving away from pure speculation.

·       Favorable Policies for Institutional Investors

The government has recently been in the policies implementation spree supporting institutional investors, including PE, VC, and open-ended mutual funds through SIPs. These policies encourage disciplined, regular investments, ensuring consistent market inflows and stability of the NEPSE index. By fostering PE/VC investments, government supports innovative businesses, while mutual funds provide diversification and long-term growth opportunities. SIPs enhance financial inclusion, reduce market volatility, and help strong companies maintain their market value. These measures collectively attract investors, boosting confidence and promoting a stable, resilient Nepalese stock market.

·       Better Reflection of the Real Economy

A diversified NEPSE with participation from multiple sectors can serve as a barometer of Nepal’s economic health, just like developed markets worldwide. This helps both policymakers and investors make better decisions, ultimately strengthening the financial ecosystem.

Conclusion
Yes, NEPSE today is often caught in cycles of liquidity and hype, but the silver lining lies in its future evolution. As more companies from different industries go public, Nepal’s stock market would eventually be more effective, giving both entrepreneurs and investors a fair platform to create and measure value. The ultimate transformation will be when NEPSE moves beyond speculative liquidity cycles and becomes a true reflection of Nepal’s economic growth story.

HAPPY INVESTING!!