Research on Nepal’s stock market, particularly focusing on commercial banks over a year period, clearly shows that firm size and book-to-market ratio have a strong positive impact on stock returns, while widely followed indicators like earnings per share (EPS) show inconsistent or even negative relationships with returns, and cash flow yield has little statistical significance .
Commercial Bank Analysis
An analysis of commercial banks listed on NEPSE for fiscal year 2080/81 demonstrates that earnings per share (EPS), although widely disclosed, does not consistently explain stock price movements. Standard Chartered Bank (SCB) reported the highest EPS of 35.03, yet its stock price remained relatively stable, trading roughly between NPR 480 and NPR 540 during the period, reflecting a modest price variation of about 12–15%. Similarly, Everest Bank (EBL), with an EPS of 31.46, showed limited price movement, fluctuating approximately between NPR 600 and NPR 700, indicating steady but not exceptional returns. Nabil Bank, with an EPS of 26.10, exhibited moderate price movement, ranging from around NPR 500 to NPR 650, reflecting gradual appreciation rather than sharp gains.
In contrast, NIC Asia Bank (NICA), despite having a significantly lower EPS of 9.26, experienced much higher volatility, with its stock price fluctuating approximately between NPR 400 and NPR 700, representing a price swing of over 70%. This indicates strong speculative activity and short-term return potential despite weaker fundamentals. Similarly, Kumari Bank (KBL), with an EPS of 8.77, traded roughly between NPR 250 and NPR 350, showing inconsistent and weaker performance. Mid-range banks such as Global IME (EPS 16.64) and Sanima Bank (EPS 17.53) demonstrated moderate price movements, with Global IME fluctuating between NPR 300 and NPR 400, and Sanima between NPR 320 and NPR 420, reflecting balanced but not extraordinary returns.
These comparisons clearly indicate that higher EPS does not necessarily translate into higher price appreciation or returns in NEPSE. Instead, stocks with lower EPS, such as NICA, can exhibit stronger price movements driven by market sentiment and speculative trading. Larger and more established banks, including Nabil, Everest, and Standard Chartered, tend to display more stable price behavior, suggesting that firm size contributes more consistently to return patterns. Overall, the mismatch between EPS levels and actual price movements supports the conclusion that Nepal’s stock market does not efficiently incorporate fundamental indicators into stock prices, reinforcing the argument of market inefficiency.
This challenges one of the biggest misconceptions among Nepali investors—that profits alone determine stock performance.
Yet, in reality, the market behaves as if these findings do not exist. Prices rise on rumors, fall on panic, and move rapidly based on short-term sentiment rather than long-term value. This disconnect highlights a fundamental issue: NEPSE is still an inefficient market, where prices do not fully reflect underlying financial data. Instead, it is heavily influenced by investor psychology, speculation, and herd behavior.
The inefficiency of Nepal’s stock market is further intensified by weak financial literacy among investors. Studies indicate that nearly 60% of investors lack a clear understanding of key financial concepts such as valuation, diversification, and risk management. This gap in knowledge significantly influences investment behavior, as many participants rely on rumors, herd mentality, and short-term price trends rather than fundamental analysis. Hence, stock prices often experience excessive volatility that is not justified by underlying financial performance. This creates a self-reinforcing cycle: uninformed decisions lead to irrational price movements, and these fluctuations, in turn, attract more speculative traders seeking quick gains.
NEPSE’s performance is strongly influenced by macroeconomic conditions, particularly monetary policy, liquidity, and overall economic stability. During fiscal year 2078, when average lending rates remained relatively low at around 8–9% and liquidity in the banking system was abundant, the NEPSE index surged to a peak of approximately 3200, reflecting strong investor participation. However, in fiscal year 2079, as Nepal Rastra Bank adopted a tighter monetary policy and interest rates increased to around 12–13%, liquidity conditions worsened, with the credit-to deposit ratio approaching critical levels. As a result, the NEPSE index declined sharply to the range of 1800–2200, representing a drop of nearly 40%, despite commercial banks maintaining stable earnings and positive EPS figures.
Furthermore, credit growth slowed significantly from over 25% in 2078 to below 10% in 2079, reducing the flow of funds into the stock market. Inflation also rose to around 7–8%, prompting further monetary tightening and negatively affecting investor sentiment. Although conditions began to stabilize in fiscal year 2080/81, with interest rates easing to around 10–11% and liquidity gradually improving, the market recovery remained moderate. These trends clearly demonstrate that stock market movements in Nepal are highly sensitive to macroeconomic variables, often overshadowing firm-level fundamentals, as even financially strong companies experience price declines during periods of tight liquidity and high interest rates.
Hydropower Sector Analysis
A comparative analysis of the hydropower sector in Nepal reveals an even stronger disconnect between earnings per share (EPS) and stock price movements when viewed alongside monetary policy dynamics. For instance, companies such as Chilime Hydropower (CHCL) and Butwal Power Company (BPCL), with relatively higher EPS levels of approximately 20–25 and 15–18 respectively, exhibited moderate price movements, typically ranging between NPR 400 to 700. In contrast, lower EPS companies such as API Power (EPS ~5) and Arun Kabeli Power (AKPL, EPS ~4) experienced significantly higher volatility, with stock prices fluctuating from around NPR 180–200 to as high as NPR 350–400, representing gains exceeding 80–100% during bullish periods. This indicates that price movements in the hydropower sector are not proportionally linked to profitability.
Instead, monetary policy and liquidity conditions play a dominant role. During fiscal year 2078, when interest rates were relatively low (around 8%) and liquidity was abundant, hydropower stocks experienced sharp rallies, often doubling in value. However, in fiscal year 2079, as Nepal Rastra Bank tightened monetary policy and interest rates increased to approximately 12–13%, the sector faced significant corrections, with many stocks declining by 40–60%, regardless of their earnings performance. Even in fiscal year 2080/81, as liquidity conditions gradually improved and interest rates stabilized around 10–11%, the recovery in hydropower stocks remained moderate and sentiment-driven. These patterns clearly suggest that, unlike traditional valuation theory, EPS plays a limited role in determining stock returns in the hydropower sector, while macroeconomic factors—particularly monetary policy and liquidity—serve as the primary drivers of price behavior. This further reinforces the broader argument that NEPSE operates as an inefficient market where external conditions and investor sentiment outweigh fundamental financial indicators.
Micro-Finance Analysis
A similar pattern can be observed in Nepal’s microfinance sector, where the relationship between earnings per share (EPS) and stock price movements is weak when compared to the influence of monetary policy. Microfinance institutions generally report higher EPS levels than other sectors, with companies such as CBBL and Nerude Microfinance recording EPS figures exceeding 40, while others like SKBBL and DDBL maintain EPS levels in the range of 25–40. Despite this strong profitability, their stock prices exhibit significant volatility. For instance, CBBL, with an EPS above 40, saw its price fluctuate between approximately NPR 800 and NPR 1400, while SKBBL (EPS ~35) moved between NPR 700 and NPR 1200. Similarly, FMDBL, with a comparatively lower EPS of around 22, experienced price movements from NPR 500 to NPR 900, indicating gains of nearly 80%.
These fluctuations suggest that even in a sector characterized by high profitability, EPS does not serve as a reliable predictor of stock performance. Instead, monetary policy and liquidity conditions play a dominant role. During fiscal year 2078, when interest rates were low (around 8%) and liquidity was abundant, microfinance stocks experienced rapid price increases. However, in fiscal year 2079, as interest rates rose to approximately 12–13% and liquidity tightened, the sector experienced sharp corrections, with many stocks declining by over 50%, despite maintaining strong earnings. In fiscal year 2080/81, although interest rates moderated to around 10 11% and liquidity conditions improved slightly, price movements remained volatile and sentiment-driven. This clearly indicates that, similar to the hydropower and banking sectors, stock prices in the microfinance sector are more heavily influenced by macroeconomic factors than by firm-level fundamentals, reinforcing the argument that NEPSE does not efficiently incorporate financial information into stock pricing.
The analysis of Nepal’s stock market across commercial banks, hydropower, and microfinance sectors clearly demonstrates a fundamental disconnect between financial performance and stock returns. Despite the widespread availability of financial indicators such as earnings per share (EPS), these metrics do not consistently explain price movements across sectors. Empirical observations show that companies with high EPS, particularly in the banking and microfinance sectors, often experience stable or moderate price changes, while firms with lower or inconsistent earnings—especially in the hydropower sector—exhibit significant volatility and speculative price increases.
This study highlights the dominant role of macroeconomic factors, particularly monetary policy, interest rates, and liquidity conditions, in shaping market behavior. Periods of high liquidity and low interest rates have historically driven strong bullish trends, while monetary tightening and liquidity shortages have resulted in sharp market corrections, regardless of firm-level fundamentals. This indicates that NEPSE operates in a manner where external forces and investor sentiment outweigh intrinsic value, reflecting characteristics of an inefficient market.
In addition, weak financial literacy among investors contributes significantly to this inefficiency. The prevalence of speculative trading, herd behavior, and short-term decision-making reinforces price volatility and weakens the role of fundamental analysis. As a result, the market continues to grow in size and participation but lacks the maturity required for efficient price discovery.
More importantly, investors themselves need to shift their mindset. The future of Nepal’s stock market does not depend on how many people invest, but on how well they understand what drives returns. Chasing trends may create short-term gains, but only data-driven investing builds sustainable wealth. Nepal’s stock market does not lack potential—it lacks alignment between knowledge and action. And until fundamentals matter more than noise, the market will remain active, but not truly efficient.
