The stock market in Nepal, called the NEPSE, offers a brutal schooling for value investors. Where Benjamin Graham, the father of value investing, preached the gospel of buying shares below their intrinsic worth, the stock market here seems to mock such prudence. The cherished price-to-earnings (p/e) and price-to-book (p/b) ratios frequently resemble fiction rather than fact, rendering value investing an almost quixotic endeavour. So does the Graham-Dodd approach have any foothold in Nepal or is it just another casualty of an unruly market?
Value investing, immortalised by Warren Buffett and Charlie Munger, rests on the premise that markets are sometimes irrational but eventually self-correct. Investors are encouraged to seek a “margin of safety”, buying undervalued stocks to profit when prices reassert with fundamentals. This rational cycle, familiar in mature markets, is noticeably absent in the NEPSE, where investment decisions are more frequently fuelled more by tips and speculation than rigorous financial analysis.
Consider the 2021 NEPSE bubble. As pandemic-era interest rates hit rock bottom, speculative fever gripped investors. The average p/e ratio blasted past 55—higher than the S&P 500 at the peak of the dotcom bubble—a figure that would cause even the most stoic value investor to blanch. The bubble’s burst might have seemed to vindicate value principles, but it was a false dawn. Post-crash, valuations stubbornly lingered above a p/e of 40, wildly out of sync with fundamentals. Such distortions beg the question: if the market does not self-correct, is value investing a fool’s errand?
Valuations still hover around 47 today with whole sectors priced as if exponential growth is a given. The disparities are stunning. Bank stocks, the most sober of the bunch, trade at a modest 16. Hydropower, the speculative darling, fetches nearly 86. The “investment” sector, vague in remit but rich in imagination, commands a p/e of 119. For a market with shaky earnings and shallow liquidity, such exuberance looks less like optimism and more like suspension of disbelief.
The notion that prices will “come back to earth” is, to say the least, optimistic, almost a fantasy. Still, there are those who keep the faith. They sift through balance sheets, discount future earnings and wait. Perhaps they are stubborn. Perhaps they are idealists. Or perhaps they know that, even in a country of soaring mountains and heady dreams, gravity cannot be defied forever. Or perhaps because “growth investing” sounds like gambling and nobody wants to admit they are simply speculating—at least not with somebody’s money.
One argument is that Nepal’s market is still in adolescence. Time, better regulation and greater institutional participation could bring discipline. The Securities Board of Nepal has made noises about improving transparency and enforcement. But promises are easier than prosecutions. Until regulators learn to bite, the market is likely to remain a jungle.
Even if reforms do come, the bigger problem may be cultural. In Nepal investing is commonly seen as a game, rather than a profession. The idea that shares represent ownership in a business—an idea at the heart of value investing—has yet to take root. The stock market for many traders is not a place to build wealth. It is a place to strike it.
Take hydropower stocks. Many possess promising pipelines of future projects, but current free cash flows scarcely justify their soaring prices. Investors chase rosy forecasts and the hope that an even bigger fool will pay a premium tomorrow. Such behaviour turns value investing into a contest of patience and faith rather than calculation.
Nevertheless, the NEPSE occasionally yields bargains that Graham himself might have relished. The mid-2022 banking sector slump, incited by fears of soaring non-performing loans, sent banks to bargain-bin prices. A write-off of all bad loans would not have toppled the system’s solvency. Yet the market, intoxicated by speculative glamour, largely overlooked this opportunity, proving again that rationality is a scarce commodity in Kathmandu’s trading halls.
Institutional investors—pension funds, insurance companies, private-wealth vehicles—are conspicuous by their absence in the country. Their stead is taken by retail investors, who tend to chase short-term gains. The fallout is a market more like a casino floor than a rational marketplace. Without institutions to anchor valuations, the NEPSE’s thin liquidity means even small trades cause seismic price swings, compounding volatility and deterring the deliberate moves that value investing begs for.
The long view is frequently punished, the quick flip rewarded. Corporate governance, when it exists, is performative. Financial reports arrive late (barring banks), if at all. Many firms disclose only the bare minimum—some not even that. The absence of strict disclosure leaves investors fumbling in the dark, undermining the data-driven analysis that value investors prize. Insider trading, meanwhile, distorts market signals and shreds any hopes for a level playing field
In principle value investing may work in Nepal. In practice it competes with superstition and speculation. That does not make it wrong. But it does make it lonely. ■
