NEPSE rises by 18% in mere 3 months; Will it continue or reverse direction? Should you buy or sell or just wait and watch?

The NEPSE index as of June 2, 2019 stands at 1,305.68 points, which is an optimistic standpoint given the continuous bear market of last year. However, the question we want to address is, Can NEPSE index go further high in another short span of time?

Not so long ago, actually only three months back i.e. on March 03, 2019 the NEPSE index stood at 1100.58 points and within three months the index rose by 18.63%, which is quite an achievement given the trend and the turnover volume of the market.

The question of whether or not the market will continue this trend is a two junction road. There are enough arguments that shows the market will continue growing and at the same time there also are enough arguments pointing towards the other side.

We, for sure, are no fortune teller to make judgments on the future, but we sure can analyze the pros and cons so that we can draw an optimum conclusion regarding our investment decision.

BRIGHTER SIDE

The first reason that allows us to have an optimistic view towards market growth and possibly a bull is the supportive budget. The annual budget for FY 2076/77 presented by Finance Minister Dr. Khatiwada has generated a spur of positive outlook towards capital market. The Capital Gains Tax has been subsidized to 5% and at the same time FM has recognized capital market as an important cog of economic machine.

Likewise, the high frequency of government capital expenditure will likely lower the market interest rates. This in turn will make the market return more attractive, pulling more investors from the group of savers. When the government expenditure rises, the economic activities increases, thereby increasing the flow of money in the economy making it more vibrant and lively. This growth will then be transferred to the market sentiment, increasing the index even further.

Slowly but surely, we can see that the level of market awareness is increasing in the Nepali capital market and along with that the overall market sentiment has also changed. Therefore, more traders are active in NEPSE these days increasing the turnover and the market index.

The FY 2075/76 is coming to an end, which means the final outcome for entire year's performance will come out and with that the prospects for dividends, either in cash or bonus shares. Thus to secure the dividends, the investors will be placing more buy orders to hoard shares of the companies who they think will provide highest dividend. This increase in demand will push the prices up and the index thereafter.

The Monetary Policy is made in tandem with the annual budget. So as the annual budget has shown positive indicators, the monetary policy is also likely to be more considerate of the market. We have seen that the macroeconomic phenomena have a direct impact on the stock market, therefore a favorable monetary policy will also push the market upwards.

In addition to all the factors, we have also seen that the market has a seasonal wave with peculiarities seen in each season. We can see over the years that in the months of July, the market usually moves upwards. Today is June 3^rd and the onset of July, if the history repeats itself, will lead an upward thrust for the market.

Picture taken from SSpro (pro.sharesansar.com)

The NEPSE Online Trading System (NOTS) had received huge criticism when first introduced, but from then till now the NOTS has improved and has received traction. In addition to that the recent integration with Nepal Clearing House (NCHL) for online payment settlement within T+1 day is a major plus point indicating our one step forward towards a more efficient market. This on one hand reduces the settlement time and at the same time boosts the confidence of the investors and motivated investors equals upward trend in index.

Finally, three mutual funds have been recently brought into market. These three funds vis-à-vis Nabil Balanced Fund II, Citizen Mutual Fund II and NIBL Sahabhagita Fund, once operational will be buying huge number of shares from the market to build their portfolio, and when the demand is high the market will surely go upwards. The NBF II recently finished allotment and its fund size stands at Rs 1.12 arba, the issue for CMF II and NIBL Sahabhagita funds are ongoing.

DARKER SIDE

As optimistic as we'd like to be, we must also have regular reality checks. In addition to the points that might lead to a sizeable index rise there are also points that might lure the index downwards.

The first of it is the confusion among the investors regarding CGT (Capital Gain Tax). Most investors are confused as to whether the CGT is an advance tax or final tax. As long as the income tax law doesn't explicitly mention that CGT is a final tax, that can't be a final tax. And since then it hasn't been stated as either final or advance tax even in the budget, people are interpreting it on their own and many are lobbying to make it a final tax. The decrement of CGT from 7.5% to 5% isn't as beneficial to the investor as it would have been if it were a final tax.

The CGT of 5% will be levied from Shrawan of FY 2076/77 and till then the expectations of investors may be hurt by their anticipation of CGT being an advance tax and that may push the market down as most would like to sell and book profit before the next FY begins.

Similarly, as we discussed above NEPSE has come to this level within a short span of 3 months only and as we know the market never moves in the same direction for an elongated period of time. So technically speaking, there might be strong resistance from traders who are in profit. Therefore, if the market goes up they might want to book their profit. Currently, we are observing strong resistance around 1322 points for NEPSE index.  Even the reduction of CGT news couldn't break the resistance level of 1322 points, which indicates its strength.

The NEPSE index is largely depended on the BFIs given their huge concentration. So, as the FY nears it fourth quarter end many are anticipating rise in Non-performing loans in the banking sectors. This surely puts the buyers' morale down as higher NPL means higher provisional requirements and therefore lower distributable profits.

Finally, we have the volatile interest rates that have been causing quite a fuss in the market. Despite the fact that the base rates of banks have fallen, the interest rates have fallen in the same manner. Reason: Liquidity shortage and competition. Therefore, unless and until the liquidity shortage is eased the rates are likely to stay near the upper limit and that means people will want to deposit their money in banks rather than participate in the capital market, thereby prompting a downward trend in NEPSE index.

Conclusion

There are usually two types of people, optimist and pessimist or risk-taker and risk-averse. If you are an optimist and believe in the brighter side and are willing to take the risk, then it's time to start buying shares you think will yield you desired return. However, if you are pessimist and think that the market won't be bull until it crosses the 1322 resistance point then it's your decision to wait and watch.

As for us, our priority is to give you all the information available at hand so that you make a decision that best fits your personality, either optimist or pessimist. Although, we would like you to be realist. Rather than going on full-offense or full-defense, carry out your due-diligence, weigh your pros and cons and then make a decision.