Why the month of July is the platter of hope for Nepalese investors? Why does market usually make its high during the July?

“The more you know about the past, the better prepared you are for the future.” –Theodore Roosevelt

I like to call July- the platter of hope. A middle class Nepali family invests its savings throughout the year just to reap the benefits in the month of July. An investor sighs with relief as he/she retains the benefit from his investment, which he/she made back in the first quarter, in the month of July. A trader keeps his/her eyes stagnant on the screen to make that one move in the month of July. Executives of banks deal with paper works, numerical figures and bad debts in the month of July to bring out their best in their annual financial reports. BFIs wait patiently to find out what monetary policy will unveil in the month of July. Investors and shareholders gather on the trading floor in the month of July to discuss the potential dividends by listed companies. Indeed, July is the platter of hope. However, at times this platter of hope serves well for few while it does not for the rest.

Let us reflect upon history to find out more about index performance in July. In last sixteen years, nine NEPSE highs have been created in the month of July.  Similarly, based on its performance since 2011, NEPSE Index has closed higher in 88.89 % of July months. It has gained around 6.6% on average in the same month.

From FY 2000/01 to FY 2016/17, there were 11 highs that were created within the months of July and August. Smart and veteran investors imply a strategy to buy in the lows of May and June and sell in the highs of July and August. If we consider the bulls created in the Nepalese stock market, the bull of 2008 was created on 31^st August, 2008 and the bull of 2016 was created on 27^th July, 2016.

 There is no one specific reason why July has so many highs. There are so many factors that complement the outcomes of July. Let us see each one of them:

1) What is the most important requirement for any investor? I know! Money might have crossed your mind before anything else. But in a way, what do we use the money for if the financial reports of listed companies are not satisfactory. There you go! Financial reports fall among the top priorities to any investor. In the month of August, majority of companies publish their fourth quarter report. The publication of such financial reports is an evidence of a company’s financial status as of now. Hence, a number of optimistic investors emerge out in the market predicting the performance of these listed companies. It wouldn’t be wrong to say July becomes the platter of hope because of the power of optimism carried among investors and shareholders.

2) The primary motive of any investor throughout the world is wealth maximization. However, the medium in which investors want to maximize their wealth might differ. For instance, majority of Nepalese investors are referred as dividend hungry investors. On contrary, investors in the western world do not prefer companies that excessively distribute dividend. Each investor might have their own reasons for their preference. Nevertheless, in the month of August, a number of Nepalese listed companies declare their dividend. What more reason does a Nepali investor need to buy shares in July? There we go! One more reason that explains July’s highest score on the index board.

3) What is that one big news in the Nepalese banking sector right now? I must say a loyal ShareSansar reader must know the answer by now. (Well, if you are unaware about the big news in the banking sector, please feel free to go through our recently published news entitled High Value Merger/ Big Merger) Yes, the current big news which is popular in the banking sector is the news of big merger. Now, who gets to decide the provision of big merger? Bingo! The monetary policy. In the month of July, the central bank (NRB) brings in all the policies applicable to banks, financial institutes and stock market. The speculations before the monetary policy are powerful enough to impact the July’s stock market.

4) Now, name one task that general public usually think our government is most efficient in? In the last quarter of fiscal year, the government is most efficient in speeding task in order to spend the budget allocated last year. A number of infrastructure projects are carried out during the month of July. Nepalese contractors and businessman get their money from government. This created liquidity in banks. Investors perceive higher liquidity in banks as positive factor to the stock market.

5) Just as investors demand favorable provisions to invest in the stock market, they are also bound with the responsibility of tax payment to the government. Until the month of July and August, investors need to pay off all their tax liabilities. In these months, as investors pay their taxes, they are free from any liabilities and hence, search for new investment avenues. Investors prefer to invest in secondary market in the months of July and August, as a result, the market usually makes new highs in these months.

A snapshot of technical analysis for the upcoming weeks:

Index is fluctuating in the 38.2% (1254) Fibonacci level in last few weeks. The index has tested this level several times but was not able to close below this level on a weekly basis. The comparatively increasing turnover does support the upward movement of the index. Moreover, on the weekly basis, the 5-weeks EMA is above the 20-weeks EMA which supports the bulls in the market. RSI hit the upper bound (over bought) in April-May and just after touching that point RSI reversed and currently hovering around slightly above the neutral point of 50. Technically, market seems positive for next few weeks

(All Analysis are done on the weekly time-period)

This July-August effect of Nepalese stock market falls under the theory of “calendar anomalies”- one of the principles of behavioral finance. However, not every single time, the stock market follows the same principle. While there are optimisms following the market, there might also be pessimisms that overshadow the optimisms of the market. Government’s unrealistic budget policies, BFIs declining performances, the ideologies shared by the current Communist party, the dissatisfaction expressed by industrialists over budget, etc. might not lead to a peak in July. On the other hand, the new CGT rate of 5% to be applied from Shrawan might encourage investors towards share market. The suitable big merger provisions might encourage investors to purchase shares of commercial banks. We cannot predict the upcoming event in secondary market precisely. However, investors might benefit if the trend of secondary market this year aligns to that of past years. Usually, investors prefer to invest once the market reaches the peak point. It is exactly the time when majority of investors sell their shares and rookie investors suffer the loss. Thus, rather than making a mistake of investing when the market reaches the peak point, history shows that investing before the bulls can be a strategically right investment.

From 7^th July, 2018 to 4^th July, 2018, the highest peak was made on 15^th May, 2019 with an index of 1321. So, will the month of July/ August make a new high? Will the platter of hope serve you well this July? Which companies are you regularly observing if you are optimistic about the upcoming months. Please let us know your analysis in the comment section below.