While NEPSE Is Flying High On Bullish Flames, Here's a Word of Caution: Utsav Bajracharya

Article by Utsav Bajracharya

Disclaimer: Stock prices are influenced by market psychology and principles of supply/ demand as much as they are by underlying company fundamentals. Investors are bullish or bearish at any time, irrespective of the market trend. Reader discretion advised.

NEPSE which hardly used to have 1 Arab transaction daily just about 12-14 months ago, reached a new milestone of 14 Arab+ transactions. NEPSE index also reached a high of 2823 points. The index was trading at around 1200 levels only a year ago.

There has been a huge rise both in the index itself and no one would have hardly imagined about 14 Arab transactions a year ago from today. There have been many changes during this time period, NEPSE being fully online, talked about from years ago, finally came into fruition so investors and traders today are being able to bull and sell stocks even during the lockdown and break records. IPOs played their part as well, big IPOs of NRIC, NIFRA actually gave a lot of people quick money, to begin with. And IPOs of CGH, MLBSL were literally like big lottery tickets among many others. So the general public was obviously attracted to the share market and there has been a record number of new Demat accounts as well. It is also important to mention that the process of applying for IPOs has been way easier and improved. The general public had to wait in long lines in the past.

Among other things, due to the coronavirus pandemic, interest rates were cut in half, many businesses had a tough time, investment opportunities were limited and historically as well as if we look at stats of other countries to market do rise in the period of low-interest rates. Globally to market rose during this low-interest-rate environment. This is considered as one of the main reasons for NEPSE's rise and its current bull run as well. Before the pandemic, BFI's were offering 10-13% on fixed deposits so few were willing to invest in the then bearish market and the market hardly rose.

But the market did rise massively, more than 130%, and turnover 13 times so economists claim the rise does not hold water during these times when businesses are not running smoothly, the economy is facing such a roadblock. The profitability of companies does not support the aggressive rise of their stock price.

In the bull run, interesting scenarios can be seen where everybody no matter what profession or level of understanding is investing in the market without much information and knowledge regarding it. New investors are following the crowd and there is a fear of missing out among them. People who didn’t invest about a year ago have started being market experts and new self-claimed experts even started consultation. And this feeling of being invincible is commonly generated in bull markets when everything you invest in rises in the short term. But these are signs of the bull market and have been seen in the past bull runs as well. But one must not forget a popular investment saying “you should know it is time to exit the market when even your milkman starts to talk stocks.”

So the market has grown, NEPSE did have its bear run for quite a while during 2016-2019, so cycle theories do tell its time for the bull, also people are making handsome profits so others have a fear of missing out (FOMO). But we must also be careful while buying stocks now as it is already at all-time high and trees don’t grow to the sky. The market has risen more than 130%. How long will the party last?

All I can say is, enjoy the ride while it lasts but do tighten up your seat belts. Calculate the risk-reward ratio while investing.

Bajracharya is a value investor.