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Is Nepal the next big undiscovered market? Interesting article...

"Fragile to frontier"

MAY 13 - Today I am here in Washington, DC getting ready to speak at the session on Beyond Frontier Markets at the Global Private Equity Conference, the biggest event in the world for private equity players in emerging markets. And as I prepare to discuss how Nepal, along with countries like Cambodia, Sierra Leone, Haiti, Sri Lanka and other nations, will be places for investors to invest in, I look forward to answering questions as to why this is not a practical joke, thoughts keep rushing.

Investors in the developed world are trying to figure out the next set of countries to look at for investment. Developed markets are not growing and East Europe has its own problems to resolve. The BRICS countries—Brazil, Russia, India, China and South Africa— are not as easy as people like to think, especially if only have a few million dollars to invest. The Middle East with its political systems and fundamental human rights issues makes people skeptical. Africa is the new flavour, but which part of Africa? Now if you take the remaining 200 odd countries and start eliminating them, Nepal does stand a chance.

Globally, it has been observed that countries that are fragile emerge as new frontiers of investment, whether after the World Wars or other regional conflict zones. There is a popular saying amongst the investment community— you should invest before the blood in the street dries up. Once the blood dries up, there will be many players that come in. Like traders many centuries back to investors in the last century, those who have been able to identify countries, evaluate the risk and invest are the ones who have benefited the most. When the initial batch of investors went to Vietnam or Uganda, fund managers were made fun of, but they made some good money. Now we have investor groups looking at countries as diverse as Liberia to Afghanistan to Iraq. Ruchir Sharma, the author of bestseller Breakout Nations, describes and argues about how new investment destinations will emerge. He argues the case for the Czech Republic, Poland, Sri Lanka, the Philippines, Nigeria and other countries that investors have written off.

For Nepal, the biggest issue that has remained is that ‘poverty brokers’ continue to portray Nepal as a poor country so that there is good ‘aid business’. In the absence of good homegrown analysis of Nepali business and economy, the impression about Nepal has been based on the hundreds of thousands of ‘cut and paste’ reports that are written by ‘parachute consultants’ who continue to paint a bleak picture of Nepal. Interpretations of the numbers are more important than the numbers itself. An eight percent GDP growth for Nepal in the 1990s is equal to three percent GDP growth today in real terms. Remittances and proceeds from sale of assets that represent bulk of Nepali economic activities do not get captured in the GDP. The garment market within Nepal is bigger than its exports. The domestic tourism market is bigger than earnings from limited foreign tourists. Today, mid to high range restaurants in Kathmandu make more money from Nepali clientele than expatriates and tourists combined. Five star hotels survive on local banquets, hosting weddings and social functions rather than international conferences. In our quest to get the next mission to decide on the next pro-poor project, no one has had time to see the positive trends.

Economists have always been good at arguing what has worked and what has not by writing papers probably a couple of years after events have taken place and quoting data that may be decades old. If economic analysts were the ones who understood the markets, they would be a much richer lot. From time immemorial, it has been a bunch of creative traders and maverick investors who have continued to find new destinations for investment. In Nepal, a bank like Standard Chartered or a multinational like Unilever or Surya Nepal, that brought in a couple of million dollars 25 years back, have their companies valued in the hundreds of millions now. In no country could you have taken away multi-folds of your investments. Professionalism and separation of the investor and the management have kept them going.

Nepal has the right ingredients to move from Fragile to Frontier (F2P) markets. First, it has a big population, the 40th largest in the world—more than one half of Australia—with a bustling national capital of about four million people. With half the population under 25, it will continue to consume more as Nepali consumption patterns are more similar to Southeast Asia than South Asia. Second, communication connectivity, linking farms to markets and positive trends in education and health will create more urban centres in rural areas. If one was to drive through east Nepal, eight-hut settlements in the 1980s have turned into bustling townships with vibrant economic activities. Third, we are seeing more young people return to Nepal from education and exposure abroad getting into entrepreneurship. They will drive the change.

Nepal can become an investment destination for four distinct types of investors. First, high-net individuals, who have a soft corner for Nepal, will move from supporting NGOs to encouraging social entrepreneurship. Samriddha Pahad is such an initiative. Second, foundations in Europe who have small funds that are just making a couple of percent a year are in search of newer destinations to increase returns on endowments. Many investors I personally met in the last year belong to this category. Third, there are a new breed of investor-advisors who are looking at would-be frontier markets. They are the ones who are structuring funds in Afghanistan, Nigeria and Iraq. Nepal, they tell us, has a better zip code than most other fragile nations. Finally, the new rich that are emerging in the hinterlands of India who cannot go to Delhi, Mumbai or Kolkata with just Indian five or 10 crores ($1-2 million) will find Nepal an attractive destination. These investments are already happening informally. We only have to see how they can come in through official routes.

Nepal’s journey from a fragile country to a frontier market has begun and it will be interesting to write an analysis of how that happened ten years from now.


Posted on: 2013-05-14 09:23 (by Sujeev Shakya - The Kathmandu Post)

Actually, I agree with you. But unfortunately, that is one of the hardest things to do – to look beyond a 6 month or a year timeframe – and focus on long term investing. Back in 2003, the Bombay Stock Exchange (BSE) traded at 3000 levels; and now after 10 years, it is trading at 19000 level today. Imagine all those investors back then who thought there is no way BSE is going to 4000…..they would have missed the opportunity of their lifetimes. Sometime, I guess, you just have to believe in dreams. Because even if someone came up with scientific calculations suggesting why and how Nepse would reach a certain point after 5 years, it would be based on a lot of assumptions and hypothetical scenarios – making the prediction….unrealistic. So, once again…this is just my unrealistic expectation.

Good thinking. Its just a expectation. We can't think tomorrow SCB will reach 10000 or NABIL will come to 15000. For reality to come true there must be some ground on which expectation are made otherwise it will be day dreaming only. Every body know if these these things happen then country financial condition will improve leading to drastic increase in capital market.

How can we say now NEPSE will reach 5000 or 10000 in ten year. We poor investors are in great dilemma and investing with one question in mind. Thinking "Will NEPSE increase to 600 level in coming years". SO its just a day dreaming and not a expectation. We are confused about 600 level how can we think about this in 10 years.

No matter how long we have indulged in the capital market of Nepal, we cannot deny that Nepse is still in an infant stage compared to most indices around the world. Those who see the glass half empty will give you a lengthy list of issues with Nepalese stock market. I, on the other hand, like to see the brighter side of things – a future that, if possible – will take us to whole new heights and glory days. It is among all these problems that we find some of the greatest opportunities ever.

If I tell you today that within the next 10 years, Nepse will reach 5000-10000 points, people might actually start hurling stones at me the next time they see me passing by. But such a dream or expectation is that really possible? Or is it just some ramblings of a mad man on a forum? But in all honesty, I do believe, and I hope that others will as well, because it is exactly in a country like Nepal (an emerging country with a lot of room to grow) that we can experience such growth. Certain factors such as political squabbles have been hurting this country for quite some time. But do you expect this to be a trend for Nepal’s future? One day, a proper government will be formed, regardless if they belong to Congress, UML or the Maoists. With Nepal realizing more about the importance of a stable economy with greater economic activity, there will be major focus on development in fronts such as Hydropower, Tourism, and industrialization.

As soon as we have a stable government, we may see huge amounts of foreign direct investment that have been eyeing Nepal, but have been reluctant to enter the market citing instability and other reasons. In the near future, trading will go online which will make it easier for all to trade equities with a single click. The government may allow NRNs and foreign investors to trade as well. This will greatly increase demand for Nepalese equities pushing Nepse to levels never yet achieved. When we look at the high trading ranges of stock indices such as S&P 500 or the Bombay Stock Exchange, wouldn’t we want to have been the investors who had invested early and remained in the market? I know I would have. The returns would have been phenomenal. So, I guess there is a huge potential for Nepse to reach high levels that are unimaginable. I see a bright future for Nepse as well as investors currently participating in the Nepalese stock market, and I hope my expectations will turn into reality.