The Ground Reality of the Share Market: AI, Remittances and the Risk to Nepal's Capital Market

In the 1950s, showing automated machines in a factory to American labour leader Walter Reuther, an official of a car company said, "These machines don't pay union dues." Reuther's reply was, "And they don't buy your cars either." Seven decades later, in the age of AI, this question has become even more serious. If workers' incomes keep falling, who will buy the products?

According to the International Monetary Fund (IMF), about 40% of jobs worldwide could be affected by AI, and up to 60% in developed countries. The World Economic Forum estimates that by 2030, 170 million new jobs will be created and 92 million will be displaced. The danger is not the numbers, but the skills gap. The competency gap between lost jobs and new jobs will widen. This debate still seems not to touch Nepal. But both Nepal's economy and share market will be affected by it.

In fiscal year 2082/83, remittances of more than NPR 23 trillion 63 billion flowed into Nepal, which is 37.1% more than the previous year. This is more than the same year's budget of NPR 19 trillion 64 billion. Last year, more than 792,000 people took labour permits, including renewals. New permits, however, fell from 506,000 to 406,000. Let us keep searching for the full answer to why remittances rose so much, but our dependence on them is clear. Domestic production, however, is sluggish. According to the National Statistics Office, the economy grew by only 3.85% last year and industry's share in GDP is 14.16%. In the third quarter, manufacturing industry contracted by 0.54%. According to a Nepal Rastra Bank study, in the first six months industries operated at only 42.11% of their capacity. Foreign income comes as remittances, is consumed in Nepal, but the money again goes out to buy goods and services.

The risk of AI and automation is hidden here. According to the IMF, the impact will first hit rich countries, and the immediate effect on our workers' sector may be less. But this protection is not permanent. As robots increase in warehouses, construction and factories, demand for low-skilled workers may fall. This year, tensions in West Asia halting labour permits for some time in 12 countries is a small glimpse of this.

A share is trust and investment in the future earnings of a productive business. In a good market, prices rise along with company earnings and dividends. In Nepal, this relationship appears not just weak but fragile.

Last Kartik, NEPSE's average P/E was 38.32, above the historical average of 31.25. At that time, commercial banks' P/E was 15.80 and all other sectors were more expensive than NEPSE's average. An economic research analysis has said that NEPSE's growth is not always coordinated with earnings and economic expansion. The market's composition is also worth examining.

• The share of banks, finance and insurance had exceeded 53%
• Manufacturing and processing industry's share was only about 7%
• Around last Asar, market capitalisation had reached 81% of GDP, while the economy grew by only 3.85%

This is not about one company, it is a pattern. Very few shares are available to the general public, which is called low float. When demand is high and supply is low, prices rise easily. The narrative that "the future is bright" spreads. Prices reach many times the book value. Then shares whose lock-in period has expired come into the market. Prices fall, and the general public gets trapped.

Here, the share price appears to have risen not due to company earnings but because ownership of shares is concentrated in the hands of promoters. This is not value, it is like artificial control. This model needs continuous demand to work. If there is coordination in buying and selling between promoters and some Qualified Institutional Investors (QIIs), then the general public's money ultimately becomes the buyer of promoters' shares. This is precisely the issue of the malpractice in the Nepali share market. The time has come for the Securities Board to publicly examine the ownership, buying and selling, and mutual relations of promoters and institutional investors.

Demat accounts in the country have exceeded 8,095,000 and more than 3,560,000 operate trading accounts. This includes workers' remittances, teachers' savings, and housewives' accumulated capital. This money gradually reaches the hands of a few limited wealthy people. If the general public keeps losing continuously, they exit the market. Despair spreads in the economy and in the future productive companies cannot raise capital. The market sends the message that investing in production does not bring profit, but only manipulation brings earnings.

There is also the risk of a double blow. Even when remittances are at a record high, NEPSE has fallen from 2,794 last Asar to about 2,590. If tomorrow foreign employment weakens and remittances fall, then with a weak market, families will lose their source of income.