While everything else is terrible in the world, why is NEPSE rising?

NEPSE seems to be on a winning streak right from the time lockdown was reimposed in Kathmandu and other prominent districts of Nepal.

The stock market reflects the combined sentiment of thousands of investors who participate in the action. Each move of an individual investor affects the upcoming move in some way. This is why it is very difficult to predict the future since every tick can change the course of the market. No two scenarios are the same.

In fact, the stock market can have the same participants, the same setup and sentiments, and still give a different outcome if the action happens in a different timeframe. Moreover, after a move happens in NEPSE, it is equally difficult to ascertain the cause of the event since it is not brought about by a single entity but rather by the general consensus.

Nevertheless, experts and market watchers always enjoy attaching a particular reason for every market move. While we can never be sure whether the argument is valid, we can always study a wide sample of opinions and deduce our own conclusion.

Backdrop

Covid-19 pandemic affected businesses and economies worldwide. Nepal also went in a complete lockdown for about three months.

The CDOs of the Kathmandu valley re-implemented lockdown from Bhadra 03 after cases seemed to be surging. NEPSE had closed at 1,407.89 on Bhadra 02. 18 days later today, NEPSE closed at 1,499.97. NEPSE had gained 42 points in the pre-market hours today. Last week, NEPSE gained the third-highest turnover in its history.

All these points to the fact that something significant is happening in the market. If it is not because of a particular reason, it is likely because of the synergized impact of a number of reasons.

Sharesansar interrogated experts, general investors, and institutional authorities on the matter. This helped us document all sides of the equation without being biased. The following are the best argument that the market and its players have about the rising NEPSE index despite the lockdown:

1) Lower interest rates on savings due to a surge in liquidity

During and after the first three months of lockdown, the banking sector witnessed a huge surge in liquidity. Since people's spending has been severely cut by the pandemic, it is logical for banks and financial institutions (BFIs) to see an increase in deposits.

And at the same time, very few entities are taking loans from the BFIs. This is because every constructive/ productive activity has been brought to a halt. Industries and factories are operating with very limited resources or not operating at all. The expansion of businesses and construction activities is almost null at this time. Thus, banks currently have more than 200 billion rupees in liquidity.

For all these reasons, banks are compelled to reduce their interest rates on deposit schemes. As a result, people are only getting minimal interest rates on their savings.

"The interest rates have plunged 25% and more," says Ambika Poudel, ex-chairman of Nepal Investors Forum. With over 20 years of experience in both the public and private sectors, Poudel has expertise in areas ranging from banking and insurance, capital market, and investment decision making. Poudel also thinks the interest rates might further decline in the days to come.

Dipendra Agrawal, a prominent investor in NEPSE who has gone through the lows and highs of the stock market in the past, said that the interest rates and the stock market have always had an inversely-symbiotic relationship. Whenever the interest rate falls, even the minimal returns of the companies become attractive, and NEPSE soars.

Anil Keshari Shah, CEO of Nabil Bank, eloquently says, "Banks' main focus at uncertain times like these is to survive and sustain. Only then can we look for upcoming growth."

Hence, more and more people are inclined to receive more-than-ordinary returns on their capital by investing in stocks.

Furthermore, because of excess liquidity, banks are offering margin loans (loans against shares) at low interest, in single digits. This further encourages market participants to take the favorable margin loans and reinvest into the market itself, which again boosts the NEPSE index.

2) Limited sectors to invest during the lockdown

As elaborated in the earlier point, people have no other platform to invest. Real estate, another great investment platform, is down at the present. New businesses aren't opening, and existing industries have very little operations to need any more capital.

Luckily, NEPSE is open. When Sharesansar called NEPSE CEO Mr. Chandra Singh Saud in the first day of the lockdown (Bhadra 03), he said that keeping in mind the Property Rights of the investors that state that every citizen should be able to buy or sell their property freely, freezing their shares in NEPSE would go against investor rights. This is the reason why NEPSE is open amidst the lockdown.

When asked whether the market will go efficiently since only 20% of investors trade online, Mr. Saud said that even though the total number of investors seems significantly higher than those who trade online, most active investors already have an online account.

Thus, investors without an online trading account are passive investors who hold for the long term, according to Mr. Saud. This is why he believed the completely online trading system during the lockdown will benefit investors, rather than go against them.

Well, it now turns out that Saud and his team of decision-makers were right. NEPSE is not only functioning normally, it has been doing pretty epic things during the lockdown.

In short, NEPSE has largely benefitted as the only investment vehicle open for investors amidst the pandemic. Both Ambika Poudel, former chairman of Nepal Investors Forum, and Dipendra Agrawal were positive on this argument. On a light-hearted note, Poudel also said that the professionals who used to be busy on normal days can now only invest and watch the stocks while they are locked inside their own homes.

3) IPO issues of promising companies

It is a widely known fact that some really promising companies have issued IPOs this year and in the last year.

Nepal Reinsurance Company, NIC Asia Laghubitta, and NRN Infrastructure and Development have all issued IPOs and are trading in NEPSE.

These are companies that are either one of their kind in their sector or have outstanding performance. Needless to say, all of them have performed well in the secondary market.

Moreover, Reliance Insurance Company Limited has also allotted its IPO shares and is expected to be listed this week or so. Ncell is already listed as a public company and it might also issue shares to the public.

All in all, the entry of these outstanding companies has not only diversified the securities market of Nepal, but it has also provided a beacon of hope for Nepalese investors.

4) Technological advancement of the Nepalese Stock Exchange

We are habituated with focusing only on the negative aspect of the stock market. However, it is worth noting that NEPSE has gone through immense changes in the last few years.

It is just that NEPSE can't overturn itself in a single click. Nevertheless, it is taking things one at a time, and the results are fairly satisfactory (again, focusing on the positive side.)

After Demat accounts were made compulsory, the buying and selling of shares have become a lot easy. Moreover, NEPSE has gained a little over 20% of online traders within a short timespan of introducing the online platform. With appropriate training and familiarity with the online platform, there is no reason why this number won't grow. While there are still countless issues to be amended in the online portal, a bird in hand is obviously worth more than two in the bush.

Just recently, NEPSE has instructed broker companies to make the payment system online/electronic. Until now, shares could be traded online but payment had to be done manually by visiting the broker offices. Now, investors can choose to pay and receive funds via electronic medium after consulting with their broker company.

When sharesansar talked to Suresh Neupane, NEPSE spokesperson, he said that NEPSE was of the opinion entirely that the digital infrastructure should further be improved.

5) Supported by historic cycles

For some reason, NEPSE seems to move in a cycle.

If we analyze the past data, we see that a bull phase typically lasts for about three years. This is followed by about four or five years of a bearish downtrend and the cycle continues. NEPSE has had three such cycles in its history.

In 2071 B.S., NEPSE had made its all-time high of 1,881. Since then, it was in a bearish downtrend. It has already been more than four years now, and the market is seeing an overall upward movement in the past few months. This might be a sign that the dark cloud of the bearish phase has cleared and NEPSE is entering a new bullish phase of sunshine and rainbows.

However, we have to admit that we are not sure exactly what causes these cycles, or whether NEPSE will move in this cyclical trend in the future. This speculation is valid only if we accept the hypothesis that history repeats itself, especially in the stock market.

Wrapping Up

Various factors elaborated above point that NEPSE might have entered a bullish phase, largely propelled by the situations brought about by the Covid-19 pandemic.

However, there are some companies that gain during bearish times and there are those that lose even during bullish times. This article only collected the opinions of investors/related experts. Some of them are quoted in the article itself, some are not.

The article is thus presented for informational purposes and is in no way a projection of the future. Research diligently before you takes financial risks of any kind.