Stock bubbles

Making a relentless ascent and setting new records one after another, the stock market has crossed the 1,100-point mark due mainly to heavy speculative buying. Investors are parking money in shares to cash in on the share issuing spree that financial institutions have embarked on to raise their paid-up capital. New investors are swarming to the country's solitary market, the Nepal Stock Exchange (NEPSE). Plainly speaking, the entry of new faces in the market is an exciting matter and a sign that the nascent market is grappling to become a reliable, strong and true platform for raising capital. Obviously, the economy can achieve a higher growth rate only when there is a well-functioning and matured stock market. But the big question is whether the present boom is sustainable to foster the timid development pace.

Will the good times last for investors? Predicting the future is a tricky business, and many analysts, economists and rational investors have failed to foresee the future of share prices. Nonetheless, forecasts are an integral part of share trading, and they are what keep stock markets worldwide alive. In the case of NEPSE, it could be concluded that current share prices are overrated and the market has overheated; and the present whopping growth does not have adequate fundamentals to back it up, even though it could not be accurately predicted. Also, market theory postulates that unnaturally high stock prices mean that a crash is inevitable in the future. If that happens, investors will lose faith in the stock market and rapidly pull out their money, triggering a cyclic downfall.

It is interesting to note that global stock market experience shows that many investors do poorly in the market over time because they chase the latest fashion -- as Nepali investors are doing right now. They are induced to do so as there is often a systematic flow of disinformation by the big players who pocket the pickings and leave ordinary investors in the lurch. What investors should understand is that they need to invest on the basis of detailed information and rationality and good forecasts. In addition, there is a role for the government, market operator and regulator if they are to protect the interests of investors and develop the stock exchange. The supply of shares needs to be increased by wooing new companies, mainly from manufacturing, trading and services. On top of that, the regulatory function of the Securities Board of Nepal should be enhanced and NEPSE's capacity to create a more transparent trading environment improved. Moreover, the government must welcome institutional investors, including mutual fund operators and brokerage houses offering investment advice and consultancy services, to prevent the market from dancing to the tune of players.
Source: eKantipur Editorial