Will you purchase shares with lower return? Then, why should I? Observing the market from their perspective: Institutional Investors!

-Dheerusha Tiwari

Veteran individual investor:

“I have a huge collection of money dumped in stock market. The market must go up”.

New individual investor:

“I have to start buying stocks. The market must remain as it is for now so that I can buy cheap”.

Technical analyst:

“Market will direct as per the charts. So, my desires and wishes will play no role”.

Fundamental analyst:

“No matter what, if I purchase the shares of companies with good value, it will benefit me in the long run”.

Short term trader:

“The market must fluctuate so that I can benefit from the fluctuation”.

Each individual investor has a different view they hold for the market. Each individual investor has the right to express his/her views on stock market. Each individual investor also has right to undertake the investment decision as per his/her understanding of the market. However, each of these views is guided by one common factor: the self-interest of respective investor.

In Nepalese stock market, institutional investors and individual investors are usually in a cold war. Individual investors suggest that institutional investors should invest in the bearish market so that the market will turn into bullish trend. On the other hand, institutional investors work based on their discipline, expertise and knowledge resource. While “buying at in a bearish market and selling in a bullish market” might somehow benefit individual investors, the same process might not benefit institutional investors. Institutional investors are often the target of individual investors when the market goes bearish. Media personnel, investors’ forums including individual investors often either blame these institutional investors or encourage the critics to voice their opinion against institutional investors. However, little has been articulated from the perspective of these institutional investors, so why not observe the current stock market from their perspective at least once?

First and foremost, institutional investors are those organizational investors who invest on behalf of the members, associates and affiliates of the organization. Institutional investors can be merchant banks, insurance companies, banks and financial institutes, business houses, high net worth investors, etc. The motive of these institutional investors is to maximize return from the avenues of investment. These institutional investors diversify their investment into different sectors such as equity, real estate, fixed deposits, promoter shares, etc. In this scenario, institutional investors are liable towards the members on behalf of whom they have invested to provide maximum return to these members.

Now, let us consider a simple example. Suppose you are opting for a housing loan from one of the banks of the country. What would you consider the primary factor for undertaking loan? The interest rate! Often, you switch from one bank to another in the hope of attaining loan with least interest rate. Now, let us consider one more example. Suppose you are considering opening a fixed deposit account. What would you consider as the primary factor? The interest rate! You switch from one bank to another; you often visit the bank bragging about another bank providing a higher interest rate, you entangle in between your networks and ask them to find the possibility for higher interest rates, you look into the advertisement columns of ShareSansar; you turn pages to pages for ads in national daily. All the efforts put into for a higher interest rate in your fixed deposit. Are you doing anything wrong?  You would probably say no. If a small amount of your investment has such high significance, don’t you think investment of institutional investors, ranging in the multiples of crores and arba, has any significance?

In addition to this, the decision to invest in stock market involves the factor of risk. Fixed deposits, bonds and debentures are relatively safer than stock market. In this scenario, the currently issued debenture of NIC Asia provides an interest rate of 10% to be paid semiannually. This debenture looks like a safer bet than most of the equity shares in the present scenario. So, why would an institutional investor invest in stock market today?

Let us briefly observe how beneficial it is for institutional investors to invest in stock market. For this, let us compare the EPS of second quarter with respect to Market price of the respective stocks. Only the companies that have published their quarterly reports as of last Thursday has been taken into consideration. Let us compare the earning yield (i.e. EPS/ Market price * 100) of these stocks with 10% of interest return of NIC Asia Debenture.

Here, only two out of sixteen commercial banks have an earning yield above 10%.

Here, only seven out of twenty four development banks have an earning yield greater than 10%.

Here, only two out of fifteen finance companies have an earning yield greater than 10%.

Barun hydropower has an earning yield less than 10%.

Prime Life Insurance has an earning yield less than 10%.

Out of twenty three microfinance that have published their quarterly report, all of them have an earning yield less than 10%.

As a normal individual investor, we switch from banks to banks in the hope of higher interest. Similarly, institutional investors switch from one platform of investment to another with the objective of higher return. Would we risk or own investment by investing in shares that provide us less return? Then, why would an institutional investor risk someone else’s investment by investing in equity when banks’ interest rates and debentures have been providing higher interest return? We have been blaming institutional investors for the bearish trend. However, we fail to understand their perspective and the actual reason of bearish trend.

Until and unless, the interest rate in banks lowers, no institutional investors will be motivated to invest in equity shares. The effort should not be in blaming one another but rather in developing NEPSE as a preferred platform to invest over other investment platforms. The higher interest rates in banks will not only affect the lenders of the banks but also the investors of stock market.

Thus, if interest rates in banks are lowered, institutional investors may switch their investment towards stock market. As a result, the prices will decline and return of investment from NEPSE will be higher compared with other sectors. Let us not confuse ourselves that institutional investors are companies or businesses not market makers. Government of Nepal has never obligated these firms to be liable for the share market of the country. In fact, government has never really created any market makers for Nepalese stock market. The only way institutional investors can come back to NEPSE is the decreased interest rates in bank and increased return in NEPSE.

  It is high time that we understand this perspective of institutional investors:

Institutional investor:

“I will invest in the platform that provides me with higher return because I am investing on behalf of the members of the organization”.