Investing in Nepal’s Stock Market
How to invest in Nepal?
Nepal is home to some of the oldest civilizations on earth. In its current form as a country however, it remains quite young. The monarchy was only abolished in 2008, and the country remains mired in political uncertainty. However, like many of the markets we cover, underpinning that political uncertainty is a burgeoning population with a strong youth demographic. Please see the fact box below for basic facts about Nepal.
The economy of Nepal remains heavily dependent on agriculture and almost 70% of labour is focused on that sector. Exports, similarly are concentrated in a few key areas. See the figure below, which provides a breakdown on Nepal’s exports.
GDP growth has been sluggish for most of Nepal’s history, with inflation persisting to be challenging given Nepal’s landlocked location and poor infrastructure. However, continued development of the tourism sector, hydropower, and infrastructure spending from government programs is expected to push average annual growth to 5% for the next decade.
For an understanding of why we are bullish on the NEPSE and Nepal, check out our piece from last week, featuring Sharesansar’s managing director.
Unlike the rest of South Asia, the influence of British Common Law in Nepal has been voluntary and at the election of Nepal’s rulers over time. Nepal historically had a legal system that was informed and developed by Hindu beliefs; the only such legal system in the world as recently as early 2000.
More recently however, Nepal has developed a series of its own constitutions after establishing itself as a republic 2008. The most recent constitution was fully ratified in 2015. Like most developing countries, the legal system looks great on paper, but that has limited application in a day-to-day context, where contacts and ‘rules of thumb’ are far more important.
Our recommendation for Nepal would be that any business or investment made, is made on the basis of a strong insight and trust of your counterparty. It is better to not rely at all on the court system, than expect it to come to your aid.
The Stock Market
NEPSE first began operation in 1997 and began electronic trading in 2007. Trading is still not automated and that creates several issues for reducing brokerage commissions and increasing liquidity. To get an in-depth overview of how the NEPSE functions, check out Sharesansar’s FAQ section here.
The basic facts on the market, you can find below:
It is a surprisingly deep and liquid market (relatively speaking) for its size, opaqueness and lack of foreign investment (more on that later). It certainly took its time, but its praiseworthy that in 20 years since market inception, it is a legitimate well-functioning market that is a legitimate source of fund-raising for Nepali companies.
To that end, the list of the largest companies by market cap can be found below for those with a market cap above $50mm.
Nepal boasts 55 companies in 2016 with a market cap over $50mm and about 10 companies following closely by. That is a surprisingly large number for such a closed market.
Can Foreigners Invest?
As of today, foreigners cannot invest in Nepal. You may wonder why we bothered spending two weeks on Nepal. The rationale for us, is that Nepal is a very exciting market that will open imminently, in the same way as we have highlighted Iran and Myanmar in previous posts.
There are various bills floating around Nepal that provide an allowance for foreign investment in Nepal within certain restrictions. However, none of that have percolated their way to actual legislation that governs NEPSE brokers. As part of allowing for foreign investments, NEPSE trading will likely have to be automated and commissions will have to be lowered. That day is not far off, and one ambitious move from a government could allow for investment rather quickly.
In our estimation, foreigners should be able to invest in Nepal, if the government remains stable by 2018. If this is the case, then it would pay to learn about the market and its companies now.
As always, any questions, please let us know.