ILLUSTRATION: SHUTTERSTOCK
ON OCTOBER 28TH Nepal’s stockmarket rose 33.29 points to close at 2,664.06. Turnover hit Rs7.47bn with shares in 241 companies advancing. For a country whose economy the World Bank expects to grow by a pathetic 3.7% this fiscal year, investors appear willing to look well beyond the next set of earnings—straight into fantasy land.
The question is what the hell they see ahead. Nepal’s stock exchange, NEPSE, lumps together banks, insurers, hydropower developers, manufacturers and other businesses whose fortunes differ wildly. Its index slaps them with a common price tag. It says far less about the profits those companies will earn to justify it.
According to Nepse Alpha, NEPSE is trading at around 38 times earnings. That measure compares the price investors pay for shares with the profits companies generate. At that level, an investor buying a broad slice of the market would cough up roughly Rs38 for each rupee of annual earnings, assuming the measure accurately captures the market’s profits. The figure is a dated estimate, and individual companies trade at wildly different multiples. Yet it points to the crushing burden placed on future growth. Companies must raise profits substantially, or investors must keep paying inflated prices for the same earnings.
Nepal has reasons for money to flow towards shares. The Nepal Rastra Bank has spent years managing excess liquidity in the banking system. Its October report on the first two months of the 2026-27 fiscal year put deposits at Rs8.52trn and lending at Rs6.08trn. The weighted average interbank rate was 2.75% while commercial banks’ average deposit rate stood at 3.11%. These figures describe a banking system drowning in funds and offering cheap short-term money.
Cheap deposits can make shares look attractive beside bank accounts. Investors expecting meagre returns from savings may accept greater risk chasing capital gains or dividends. The central bank has also loosened some rules on margin lending, which lets investors borrow against shares. In July it raised the permitted loan-to-value ratio for such lending to as much as 80% under amended rules. That gives eligible borrowers greater scope to finance purchases with debt—and leaves them more exposed if prices crash.
The flow of money into the market, however, tells only half the story. In the same two-month period, private-sector credit grew by 7.2%, according to the Nepal Rastra Bank. Banks can have funds available while finding too few borrowers they consider safe or profitable. Weak demand for business loans may reflect lousy sales prospects, uncertainty or the rotting condition of borrowers’ balance sheets. Whatever the mix, excess cash in banks does not automatically become new factories or higher company profits.
That matters in a market where several sectors depend on the same underlying economy. Banks need borrowers able to repay loans. Insurers need investment income and enough premiums to cover claims. Hydropower companies need projects to produce electricity and sell it on terms that cover construction costs and debt. Manufacturers need customers willing to buy their output. A rising share price can anticipate better results but it cannot produce them.
Hydropower is a good example of the chasm between an attractive national prospect and a profitable listed company. Nepal has considerable scope to generate and export electricity. Yet investors must still assess each developer’s construction costs, debt, generation capacity, power-purchase agreement and access to transmission lines. A company with an unfinished project and heavy interest payments faces a different future from one already selling power. Both may benefit from enthusiasm for the sector, but their earnings will arrive on different schedules.
Banks face a similar test. Low interest rates can kick down funding costs and help borrowers service their debts. They can also squeeze the difference between what banks earn on loans and what they pay depositors. Loan growth matters, as do bad debts and the money banks must set aside against losses. A cheap share in a troubled lender may prove expensive; a high-priced share in a well-run bank may earn its valuation. The index alone cannot settle the question.
Nepal’s wider economy offers reasons for caution. The World Bank forecast growth of 3.9% for fiscal year 2025-26 and 3.7% for 2026-27. Remittances remain a major source of household spending and foreign exchange, but they have yet to create a comparable supply of productive jobs at home. When domestic demand relies heavily on income earned abroad, listed companies must find ways to capture that spending while competing with imported goods and services.
There is a further problem with the market’s breadth. A handful of large companies can shape an index, while speculative interest in smaller stocks can produce sharp price moves with little change in their underlying businesses. On October 28th Beni Hydropower gained 15%, the daily limit reported by Nepal News. Such a move may follow company news or a shift in demand for the shares. The price change alone offers zero evidence about the company’s long-term earning power.
Investors need company accounts to answer that question. Earnings per share show how much profit a company generates for each share; return on equity measures the profit it earns relative to shareholders’ funds. Cash flow shows whether reported profits convert into money available to repay debt or pay dividends. These measures are especially useful when a company’s share price rises faster than its earnings. A low price-to-earnings ratio can still conceal a business in decline, whereas a high one can be justified if profits grow steadily for years. The danger is treating expected growth as if it had already arrived.
Nepal’s stock market also has a limited set of alternatives for domestic savers. Property can require large sums and is a bitch to sell fast. Bank deposits offer security but dismal returns when interest rates are low. Shares are easier to trade, and a small investor can buy into a listed company without purchasing an entire business. That makes the market useful for savings and for companies seeking equity capital. It also gives shifts in confidence considerable power over prices.
The bigger test is whether the exchange helps businesses raise money for expansion or chiefly gives existing shareholders a place to trade ownership. New share issues can finance projects, add capital to banks or fund corporate investment. Trading in already-issued shares changes who owns a company, but the cash usually passes between investors rather than into the business. A buoyant market can support investment: yet a rising index alone says little about how much fresh capital reaches productive firms.
Nepal’s investors have reason to expect a richer economy in the years ahead. Electricity exports can grow, technology firms can sell services abroad and better-run companies can reach larger markets. Those prospects deserve a place in share prices. The test will come in quarterly reports: stronger cash flow and profits that grow faster than the number of shares issued. Until those figures arrive, NEPSE is pricing the promise of a more productive Nepal. The companies listed on it still have to build that future. ■
