ApEx Series | The vicissitudes of Nepali stock market

Sunny Mahat

Sunny Mahat

ApEx Series | The vicissitudes of Nepali stock market

Any bull run, although considered the most conducive time to invest and make money, is invariably accompanied by ‘corrections’

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.