Business

Reasons behind Nepal's recent market gyrations

Manil Shrestha

March 8, 2020, 6:07 p.m.

Reasons behind Nepal's recent market gyrations

After reaching a low of 1,100-ish, NEPSE made a positive move of 250 points between the second half of November 2019 and mid-January 2020. This upward move was primarily supported by micro-finance, life and non-life insurance, and production sectors. The index reached 1,350 by January 19 and the struggle to move beyond ensued. For the next one month, it tried to break the 1,350 resistance multiple times but could not. As mentioned in previous issues, the main culprit was the unsupportive banking and financial sectors. Banking sector alone has more than 50 percent weightage in the Nepali bourse. Without a positive move in the banking sub-index, it is challenging to see a sustainable long rally in the main index.

NEPSE’s move towards 1,350 had created a positive vibe in the market. As soon as it reached 1,350, the public’s positive sentiments could be felt, with the average daily transaction volume reaching one and half billion rupees. From mid-February, banking sub-index also joined the party. The market turned ecstatic. No one wants to be left behind; everyone wants a piece of cake. More and more money poured in. Greater public participation could be seen at each and every broker house. Each day a record was made. The daily transaction volume reached above four and half billion rupees. Within two weeks, the index moved unchallenged close to 1,670-ish, adding 320 points. Greed took over common sense. And, on March 2 the inevitable happened: a massive correction of almost 100 points within a day resulting in negative circuit.

Until a month back, the market was abuzz with talk of liquidity crunch and its negative effects in the secondary market. But the way money has been pouring in
for the past few weeks portrays a completely different picture. The question is: have bank rates gone down significantly, has there been a fundamental shift in profitability of the companies traded in the secondary market, or have people come to their senses and dug up their hidden treasures to invest? The answer to all of
these is ‘NO’.

By the time the market moved up to 1350-ish, regular trade itself was worth one billion plus rupees each day. Natural market growth got prudent investors to either not renew their term deposits or to at least invest a portion of their term deposits back into the market. Recent government regulations made it challenging for the banking sector to lend. The changing secondary market scenario gave them impetus to move towards the upper limits in margin lending. Trading limit being provided by the broker houses also motivated regular traders to increase their trade volume. These factors set a strong foundation for the market to attract more people. The positive change in the scrip rates brought in new generation of investors/traders. With each passing day, it became evident that the market might have passed its bearish phase. This gave confidence to earlier generations of investors/traders who could now spread their investing wings.

They say, money attracts money. The closure of Nepal-China border has left the traders of Chinese goods with few options to make their money work. The slowdown in construction has also forced those in real estate to look for alternatives to hedge against the declining value of their money. Positive vibe in the market lured in this segment of the population. As with every bull run, increasing scrip rates brought in greater public participation. This further fueled market movement. The current correction phase is providing smart investors/traders an opportunity to review their strategies and realign their positions accordingly.