The media reported this week that the share prices touched a record high in the 14-year history of the Nepal Stock Exchange â€“ the Nepse index hit 1000.49 points on December 9 over the level of 992.81 points at the close of the past week. But, what strikes one as odd is the trend of rising share prices whereas the economy as a whole is not growing at the same time. There are reports that investors are not still feeling confident about investing in the country because of insecurity and instability, apart from reports of capital flight. These and other signs give strong grounds for suspecting that the rises have been manipulated. About 90 per cent of the shares traded on the Nepse floor belong to financial institutions. This is another oddity: logically, both the stock market and the financial sector should be barometers of the health of the economy â€“ these sectors should go up or down with the upswing or downswing in the economy.
Genuine ordinary investors buy shares in expectation of a good return on their investment. If they see the share prices of a company rising, they tend to believe â€” at least in Nepal where lay investorsâ€™ knowledge of investment criteria and decision rules are so poor â€“ that it is the best bet for them. Unscrupulous elements play on this psychology. Savvy investors may take various factors into account before they put their hard-earned money into the shares of any company. A key yardstick for judging any company worthy of investment is the ratio that its earnings per share bears to the price of its stock, that is, the price-earnings (P/E) ratio. The higher the ratio, the more expensive is the stock of the company relative to its recent earnings. If any investor buys the shares of a company with a higher P/E ratio, it means either that they expect earnings to rise in the future or that the companyâ€™s shares are overvalued.
The second applies to the case on hand, because those â€˜high-flyingâ€™ companies have not paid
dividends to their shareholders in recent times high enough to support the skyrocketing values of their shares. The ratio of 15 is internationally considered the typical cut-off point of the P/E ratio for the investors. But all the companies flying high on the Nepse show their P/E ratios to be much higher â€“ most of them have P/E ratios ranging from 40 to well over 70. This indicates their shares are dangerously overvalued. That also means that the share mafias have massively manipulated â€“ kept artificially high â€“ the prices to rake in profits. Once the share prices crash (they will have to), it is the unsuspecting ordinary investors who will be the hardest-hit. There are certain mechanisms put in place to take care of the artificial lows and highs in share prices â€“ particularly trading halt, circuit breakers, and writing letters to the companies about the unnatural-sounding big jumps in their shares. But these have yet to be effective. What is no less important, and is urgently needed, is a tough law to check insider trading â€“ the misuse of financial information by insiders at the Nepse, the central bank, and commercial banks â€“ to influence share prices.