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After steadily declining for almost three years, Nepal Stock Exchange (Nepse)’s index showed strong resistance around the last week of November 2019, when the market started bucking the strong down-pull.

Experts believe Nepal's lone stock market has been on a bull run since January 2020. The exchange’s index, which stood at 1,182.31 points on 5 January 2020, surpassed the previous record of 1,881.45 points set on 26 November 2020, and then started steadily climbing upwards.

Any bull run, although considered the most conducive time to invest in a stock market and make money, is invariably accompanied by periods of ‘corrections’ when a large group of investors sells its holdings to book profits. The first major correction during this bull run was observed in March 2020 when the Covid-19 pandemic forced the country into a lockdown.

The market was ill-prepared to take its business online immediately and many traders/investors did not have online trading accounts. Also, confusion prevailed over the market’s future, resulting in panic-selling. In this period, the index, which had reached 1,670 points, soon fell to 1,150.

The index started creeping up from June-end but witnessed another correction at 1,561 points, before reaching a bottom of 1,368 points in mid-July 2020. From then on, there were multiple minor week-long corrections and the index moved sideways. Only in the third week of February 2021 did the market see a multi-week correction of four weeks with a top of 2,676 and a bottom of 2,369 points.

After that, corrections have been regular. Mid-April saw a two-week correction with a high of 2,760 points and a low of 2,500 points. The market is currently going through another correction with a 3,227-point high and 2,779-point low.

With the government announcing a ‘budget holiday’, there is fear of a liquidity crisis in the market. At the same time, Nepal’s private banks have started offering higher interest rates on deposits from September 17, adding to speculations over a brewing liquidity crisis, which could have a direct adverse effect on Nepse. The average interest on fixed deposits growing to nine percent from around 5-6 percent, investors might switch to the safer option of putting their money in the banks rather than in the stock market, analysts fear.

Given these conditions, we asked some experts how long they thought the bull run would last. As expected, we got varied answers.

“Irrational exuberance,” entrepreneur Karma Tenzing uses the famous phrase coined by the former US Federal Reserve Board chairman Alan Greenspan during the dot-com bubble of the 1990s. The phrase can be interpreted as a warning that the stock market is overvalued.

“We see a massive overvaluation of stocks right now. Everyone is getting high on the stock market. Companies making zero profits or even losses have high share values. The market is overheated and fundamentals or technical analysis make no sense,” Tenzing says.

An active trader with a substantial investment, Tenzing has now quit the market; for him the Nepse bull run is over. He believes the market has already reached its highest point and will not go beyond that for another year. “Irrational thinking” and also increasing interest rates on deposits will lead to the market’s continued downfall for now, Tenzing says. He looks forward to reentering the market after a year when “saner minds prevail.”

In Nepal, based on past trends, a bull run typically lasts for four years followed by a three-year bearish market. When the bull began in January 2020, most traders and investors had speculated the same. “But this belief is based on the concept that history repeats itself,” says Manil Shrestha, a veteran investor, and ApEx’s former share market analyst. “But the main factor that drives the share market is interest rates.”

Shrestha explains that if interest rates increase by small percentage points, it supports the market. But rapid growth in rates will hit the market hard. The market had already anticipated the hiked interest rates from Asoj 1 (September 17), and hence saw a decline in aggressive buying and the selling pressure increased.

But even with both the volume of trades and the index falling steeply, Shrestha does not see this as the end of the bull run. Once the government spending begins and there is a flow of remittance and the Dashain businesses boom, the liquidity situation might quickly improve. “It's too early to predict the end of the bull run,” Shrestha says. “The market might go sideways for a while. But if the interest rates do not increase or decrease substantially in mid-November, the market will become positive again.”

Mukti Aryal, another veteran trader and financial analyst, is more positive about the market’s trajectory. Although making predictions is difficult, Aryal feels the bull run will last for another year or year and half. And even after that, the market will not decline, unlike during the past bearish markets. The market will gain balance due to the high volume of investors plus the increased number of institutional traders.

About the frequent corrections in the market, Aryal believes they will only help sustain the bull run. “When there are frequent corrections, the market can sustain longer bull runs,” Aryal explains. “The share market is like a rubber band. The more you stretch, the more it will contract.”

Aryal believes the market is underpinned by strong fundamentals. So if the companies listed in the stock market grow and can give decent dividends to their stakeholders, Nepse will grow accordingly. 

As for the current bull run, Aryal sees the index reaching around 4,000 (plus/minus 5 percent) by the end of this fiscal. “The liquidity crisis like the one we are seeing now is to be expected when banks are investing heavily before the financial year’s close. Soon, the banks’ investments will start giving returns and interest rates might decrease. There will also be plenty of cash flow in the financial system during Dashain,” Aryal adds. “This correction is temporary. The bull run will continue.”

For Ashim Lamichhane, a tech professional who makes maximum use of technology to trade in the stock market, the bull is not over yet. “Computer-generated data do not work accurately all the time in the Nepali market but they do give us a good idea,” Lamichhane says. “We can establish target levels based on market theories but can’t swear by their accuracy.” As per Lamichhane’s calculations, the index will remain around the 3000-mark for some time. “There is an immediate support zone for the Nepse index at 2,910-2,920,” he adds.  

However, this depends on the volume. If strong resistance is met around the said figure, 3,400+ is achievable. “I expect the market to go up after the festive season. Till then, it will stay within a fairly stable range,” Lamichhane says.

As of September 6, the CDS and Clearing Ltd (CDSC)—a subsidiary company of Nepal Stock Exchange Limited (NEPSE) that provides centralized depository, clearing, and settlement services—has 3,361,171 users registered on its ‘MeroShare’ website. This means that if there is an Initial Public Offering from a company, 3.3 million users can apply for it online, without having to visit the issuing capitals.

Similarly, NEPSE informs that as of this week, there are 923,000 users registered in its Trading Management System (TMS). So on any given Sunday, all of the 923,000 users could log in to the TMS website, causing a crash. The crashing of both TMS and MeroShare, due to high user volumes, has happened before and many users have complained of ensuing losses.

Online securities trading in Nepal for both primary and secondary markets has come a long way since its beginning on 6 November 2018. The introduction of an online IPO application system reduced the need of lining up for hours in capital offices to manually fill the forms. And TMS gave the users the luxury of buying and selling stocks as well as making and receiving payments from their homes without having to visit broker offices and banks.

“Anyone who says online trading has not helped them is out of their mind,” veteran investor Nirmal Pradhan tells ApEx. Pradhan believes online trading has roped in many new investors to the market which has, in turn, contributed to high trading volumes.

Prayas Dulal, a business analyst who recently completed his first year in the market as a trader, differs. Having looked at many online videos, resources, and tutorials for trading, Dulal finds both TMS and MeroShare very basic, primitive even. “On days of IPO opening or allotment, we can’t even log in to MeroShare,” Dulal complains. “I used to panic when I had sold shares but could not complete my Electronic Delivery Instruction Slip (EDIS) on time to avoid close-out penalties.”

As a long-time investor and an active trader, Manil Shrestha’s views on the online trading system are closer to Pradhan’s. Having closely watched the market since 2003, Shrestha feels that securities trading in Nepal has progressed by “leaps and bounds.” Before TMS, traders had to depend on brokers for buying and selling stocks by either going to the office physically or through phone calls and text messages. Any lapse in communication would lead to losses and there were many human errors.

“Now with the online system, you can grab immediate opportunities and not let anything break your momentum,” Shrestha says. About the momentary failures of both TMS and MeroShare.

Shrestha does acknowledge the problems and agrees there is room for improvement. “Heavy traffic in both MeroShare and TMS causes the system to jam. This can be improved by increasing their bandwidths,” Shrestha says. “But again, these high-volume trades that crash TMS happen like 15-20 times a year. So how feasible is it going to be for NEPSE to maintain heavy bandwidths all year long?”

SEBON, the government-established regulator of the securities market, is aware that the current system is not tailored to handle a high number of users. “We have asked both NEPSE and CDSC to audit their systems and upgrade their capacities,” Ajay Dhungana, Assistant Director for Research at SEBON, informs. “We cannot build systems that cover the country’s entire population and have to upgrade based on best estimates of potential growth in the number of users.” Dhungana suspects that the various anomalies and glitches seen in the system might have been caused by unexpected growth of online users during the Covid-19 pandemic and lockdowns.

“We have made some major upgrades in the past two to three months and have sorted 80 percent of our issues,” informs Kanchan Sapkota, Head of Operations at CDSC, the NEPSE subsidiary responsible for managing MeroShare. “Further, we are planning a huge upgrade of our system this year to cover the high number of users registered with us and make the system even more advanced.” Despite these upgrades, glitches cannot be completely removed, Sapkota adds. As for the issues related to EDIS, MeroShare is not solely at fault, Sapkota explains. “There are different parties involved in MeroShare including the users themselves, NEPSE, and the brokers. Failure on the part of any one of them to act properly can cause a problem in the system,” Sapkota says.

Speaking on behalf of NEPSE, Murahari Parajuli, the company secretary and information officer, adds that the exchange is also working on upgrading the system. NEPSE is trying to have the brokers build and operate the TMS to shed its load. The brokers can choose from the different available modalities of TMS operation but within the requirements set by NEPSE. “We have already changed some bylaws to allow this and are waiting for SEBON’s approval for the project to go ahead,” Parajuli informs.

He further explains that although NEPSE is often blamed whenever there is a problem in the system, there is more to the story than meets the eye. TMS is a platform that NEPSE operates but the associated brokers are responsible for maintaining their individual servers. “Most brokers make thousands of clients and take commissions from them but do not increase their server capacities or improve their data center,” Parajuli says. “So in the end, everyone ends up blaming NEPSE for any shortcomings in the system.”

Around 1935 then Prime Minister Juddha Sumsher Rana recalled the Nepali Ambassador to Great Britain Gunjaman Singh to Kathmandu. The goal was to use his experience and exposure there to help establish the first Industry Council of Nepal. Two years later, Biratnagar Jute Mills and Nepal Bank Limited were created. Both the organizations issued shares to the public, making them the first securities to be floated in the Nepali market.

In 1976, the government created the Securities Exchange Center to manage public issuance, create a market for government bonds and function as a stock brokerage firm. But as more public companies were starting to emerge, a dedicated stock exchange had become a necessity. And so, in 1993, the Securities Market Center was converted to the Nepal Stock Exchange (NEPSE) and the exchange officially opened its trading floor on 13 January 1994.

These days, NEPSE functions under the Company Act 2006 and the Securities Act 2007 with the objective of imparting free marketability and liquidity to the government and corporate securities by facilitating transactions on its trading floor through members, market intermediaries such as brokers and market makers. 

After its 1994 opening, the securities market began functioning with the ‘open outcry’ system on February 11 the same year and the Base Index for NEPSE was set at 100 on February 12. By the end of 2050/51 (1994/1995), the index had reached 226.03. The NEPSE index reached its all-time high of 3111.09 on 3 August 2021 . The open outcry was a popular method around the world for communicating orders in trading pits in which traders used verbal and hand signals. Signals and shouts made in a particular manner and sequence conveyed trading information, intention, and acceptance in trading pits.

The 2011 bang

“NEPSE did not reach its current digital and automated state overnight,” says Shankar Man Singh, former CEO of NEPSE (2009-2013). Singh recalls how most trading procedures were manual and time-consuming. At the time Singh took over the reins of NEPSE, there was also an ongoing court case against the examination, selection, and licensing processes of brokers.

“It was during my tenure that we were able to settle the case and issue licenses for 27 more brokers, taking the total number to 50,” Singh explains. “We also established the CDS and Clearing Limited in 2011.” With the arrival of CDS and Clearing—a subsidiary company of NEPSE that served as a centralized depository, clearing, and settlement services—the safekeeping, deposit, and withdrawal of securities certificates and transfer of ownership/rights of instruments got easier.

The securities exchange in Nepal has come a long way. Initially owned by the Industry Council (51 percent) and Nepal Rastra Bank (41 percent) with a paid-up capital of Rs 1 million as Securities Market Center, NEPSE now has a paid-up capital of Rs 500 million. Ownership has also shifted to a combination of government and private entities that include the Government of Nepal (58.66 percent), Nepal Rastra Bank (14.60), Employees Provident Fund (10), Rashtriya Banijya Bank (6.14), Laxmi Bank Ltd (5), Prabhu Bank Ltd (5) and other securities/brokers (0.60).

At present, there are 50 licensed brokers with 43 branches that operate on the trading floor as per the Securities Act 2007, rules and bylaws.

Financial expert and a seasoned stock market trader Mukti Aryal recalls waiting for up to two months to transfer the shares he bought to his name. Selling a scrip also took considerable time as there weren’t enough  buyers. As a management student who also did his thesis on stock market and as the research department head for Citizen Investment Trust, one of the biggest investors in NEPSE, Aryal had been following Nepali securities market since the early 1990s. But it was only in 1996 that he officially entered the market as a trader with around Rs 400,000 of his savings.

“Working with the CIT, I had to analyze what shares to sell, buy and hold and present it to the investment committee,” Aryal explains. “That’s how I got acquainted with the market.” Aryal recalls Nepal Lever (now Unilever) among the industries and banks such as Nepal Bank Limited, Grindlays (now Standard Chartered), Nepal Arab Bank (now Nabil), Nepal Indosuez Bank (now Nepal Investment Bank Limited), Himalayan Bank and SBI bank as the most sought-after scrips of the period. 

“Most people were unaware about the market and, unlike these days, there was little price fluctuation,” Aryal says. “Still, trading was not so easy when we had to completely depend on the brokers with no access to information.”

New age, same mindset

Ambika Prasad Poudel, one of the biggest names associated with the Nepali share market, agrees. “There were limited brokers and investors had no access to information on what was happening in the market. There was no information on market depth either,” Poudel recalls. “We placed buy or sell orders and sometimes were informed weeks later that the transaction never happened. The brokers controlled everything.”

Even at its primitive stage, NEPSE had become a victim of corruption and served the people in power more than it served common investors.

Poudel is also on the board of multiple companies listed under NEPSE. A management student, he started his share market journey in the early 1990s when NEPSE was still called the Securities Exchange Center. Recalling the manual processes of buying/selling and keeping of physical copies of shares, Poudel adds that there were thousands of unaccounted shares lying around at NEPSE and broker offices. “Now we have an excellent tracking system and can monitor every market and broker activity. We never imagined we would see so many improvements.”

Although the methods of trading have changed and even improved, the market’s mentality remains the same, Poudel adds. In his almost three decades in the securities market, Poudel has seen his share of bears and bulls.

“In the market cycle, every time we head towards a bearish trend from a bullish one, we lose around 70-80 percent of investors who had entered the market during the bull run,” Poudel explains. “Similarly, when we move towards bull from bear, we add new investors in almost the same ratio. This is the nature of the market.” This is also a reason why there are only a few long-surviving traders and investors.

When the market is on a bull run, investors get optimistic, assuming the market will forever grow. This mindset has not changed in all these years and is the reason behind the failure of most traders.

People think that as the number of investors as well as market capitalization keeps increasing, there will never be a prolonged market slump. “But whatever goes up must come down. So, although the market might not fall to the previous levels, it will go down,” Poudel adds. “Ultimately, in the capital market, there are more losers than winners.”

Poudel says he has risen and fallen plenty of times in the share market and keeping an open mind and adapting quickly to changes has helped him survive. 

The 2018 bigger bang

One of the biggest failure stories has to be that of trader and investor Nirmal Pradhan. Sometimes mockingly dubbed Nepal’s answer to Warren Buffett and considered a poster child for the share market, Pradhan was lured into the market when he first got allotted the IPO of the Nepal Industrial and Commercial Bank (now NIC Asia) in 1998. Pradhan had filled seven different forms out of which he was allotted 250 units each for two of the accounts. The stock opened in the market with a price range of Rs 380-400, almost quadrupling his investment.

This newfound success had Pradhan, aged 45 then, investing almost Rs 40 million in the secondary market. “I had no idea that it was near the end of the bull market when I invested,” Pradhan recalls. “My investment dwindled to almost zero in the next 45 days.” But Pradhan was resilient and continued to trade, recovered his losses and continued investing.

While Pradhan had initially entered the market without much knowledge, Durga Tiwari was a comparatively late entrant. She entered the market in 2005 as one of the rare female traders, who, by now, has stayed put for over a decade. A homemaker in the past, Tiwari decided to take formal lessons in share market investing after failing her Public Service Commission examinations three times in a row.

Tiwari entered the market with some of her savings, buying 50-100 units of commercial banks. She also applied for almost every IPO and continued trading with whatever little fund she could manage. Tiwari recalls her initial days in the market when the index had touched a high of 1,175 and was falling towards 700. “Despite my experience and training, I failed to foresee the bearish trend and suffered,” she says.  

Tiwari had at one point built a portfolio of almost Rs 10 million. During the bearish run, it fell to Rs 3.3 million, when the index tumbled below 300 in 2012. “But unlike most people I did not leave the market,” Tiwari says. “I stayed put and recovered all my losses.” Tiwari remembers how she used to sit at the broker’s office every day during trading hours before the online trading system started. “Now I sit in front of the computer and trade every single day. This is my full-time job.”

Even with its many technical glitches, most share market investors ApEx talked to accept that the NEPSE Online Trading System (NOTS) launched in November 2018 has vastly changed securities trading in Nepal. NOTS made transactions faster and more transparent, in what was undoubtedly a huge step towards the modernization of the Nepali share market.

From having to visit the exchange center and then the brokers to fill out buy and sell orders and wait for weeks for confirmation, the share market now processes all transactions within hours.

“We started at a time when everything had to be written on paper and blackboards, Ambika Prasad Poudel recalls. “In the 1990s, who would have thought that an investor could buy any number of shares they wanted with a button’s click?”

The Nepali New Year’s Day 2028 (14 April 1971) brought joy to Tulsi Giri. It was the day King Mahendra nominated him a mem­ber of the Rastriya Panchayat. But Giri’s happiness was short-lived. Mahendra’s successor, King Biren­dra, did not like Giri. So, on 9 Octo­ber 1972, King Birendra forced him to quit Rastriya Panchayat. Nonetheless, the palace did not want to drive the ‘sharp horse’ away, as it could later be put to use. A little later, Birendra appointed Giri his personal ‘political adviser’ where­upon he became entitled to state perks equivalent to a minister.

In 1975, the constitution was being amended to introduce liberal reforms to the Panchayat rule and in order to bring the Subarna Shum­sher panel of Nepali Congress into the Panchayat fold. But right then Indian Prime Minister Indira Gandhi imposed a state of emergency and curtailed democratic rights. On 11 June 1975, she had Indian political leaders arrested.

Developments in India gave strength to Nepal’s conservatives who started asking, ‘If democratic India can be so illiberal, why should we be liberal?’ So the palace drafted a conservative constitution even though the recommendations it received were overwhelmingly in favor of liberal reforms. When it needed the right candidate to implement the conservative consti­tution, Giri was appointed the prime minister in a surprise announce­ment on 30 November 1975, 10 days before the constitution’s promulgation.

That day, Giri was getting his car fixed at a workshop when he got a message from home: “Call the palace secretary.” He did, and was told to go to the palace imme­diately. He hurried to the palace in a safari suit and sandals. King Birendra sent him to cloud nine by telling him that he was the new prime minister. Rejoiced, Giri pre­sented ‘daam’ (token) to the king. Then, King Birendra issued a stern warning: “I will not spare you if you trouble me as you troubled my father.”

Giri’s joy instantly turned into horror, for ‘sword’ and ‘palace’ were considered to come together, as epitomized in the saying: “Jasko Tarwar Uskai Darbar” (He who owns the sword also owns the palace).

Meanwhile, Bishwabandhu Thapa had been active in politics since 1966, proposing liberal reforms in the Panchayat rule. When his pro­posal was rejected, he resigned as Rastriya Panchayat member. He was about to make a statement against the Panchayat rule when he was arrested and sent to Nakkhu Jail on the midnight of 13 May 1967. His political colleague Surya Bahadur Thapa was the prime minister at the time. The inci­dent established that there was no permanent foe or friend in politics. Thapa would spend four months in jail.

He was later appointed the chair­man of Gau Farka Rastriya Abhi­yan (Return to Village National Campaign) in 1969. While in office, he wished to be a Rastriya Panchayat member and went to Chitwan to contest election, where he was defeated right at the ward level. Back then, a Rastriya Pan­chayat member had to win elec­tions at village and district lev­els as well. He then resigned as the chairman of Gau Farka on moral grounds.

Five years later, Thapa was again appointed the chairman of Gau Farka. In the run up to Janamat San­graha (referendum) of 1980, he quit Panchayat rule and started support­ing multi-party system. He returned to the Panchayat fold again in 1983. In his later years, he was limited to the role of heading the Panchayat’s ‘Elder’s Club’. Despite being at the forefront of the Panchayat regime, he couldn’t get the coveted prime minister’s post, largely due to his flickering loyalty.

Next week’s ‘Vault of History’ will discuss corruption charges against Tulsi Giri and his disillusionment with the Panchayat rule