Hi everyone, Mr. Positive Lal, here. “I know I should enter the secondary market. But guess what? I won’t.”

On my last two visits to broker office, I came across two of the investors in the trading floor; Mr. Positive Lal and Mr. Prasna Lal. I met these two at two different context of the Nepalese economy. Keeping into consideration, Mr. Positive Lal and Mr. Prasna Lal are the representation of investors in Nepalese secondary market, the excerpt of their conversation has been prepared:

Situation 1:

In the month of April, 2018, the commercial banks were fighting for the survival of fittest in the banking industry. The haphazard increase in interest rate by the commercial banks revealed that banks were sort of funds and thus, increasing deposit interest rate was the only avenue to bring funds from the market. The central bank of the country was preparing the monetary policy. Investors were in a wait and watch approach as the fiscal budget had disappointed the sentiments of investors. The below experts are from the conversation of Mr. Positive Lal and Mr. Prasna Lal when interest rates in the banking sector were high:

Mr. Prasna Lal: NEPSE Index is in a continuous bearish trend. There is no sign of bullish. Or, is there one?

Mr. Positive Lal: Of course not. Until and unless, commercial banks are offering higher interest rate, investors like you and me, will not be motivated to enter the stock market.

Mr. Prasna Lal: But is it solely the interest of individual investors that is impacting the NEPSE index?

Mr. Positive Lal: To some extent, yes. However, to a larger extent, market depends more on the institutional investors. If institutional investors enter the market, then only the index will take an upward turn.

Mr. Prasna Lal: But, why are institutional investors hesitant to enter the market?

Mr. Positive Lal: They have a higher return in deposits so, why would they risk huge chunk of money being wasted in stock market. I guess, they will wait for index to come down further and then invest.

Mr. Prasna Lal: So, what is your plan for the upcoming days?

Mr. Positive Lal: Well, right now, I am waiting for the interest rate of banks to come down. I will then enter the market before the institutional investors enter the market. This way, I will secure my portfolio from losing right now. In the coming days, I will be able to enter the market when interest rate falls down.

Mr. Prasna Lal: So, as of now, your investment depends upon the interest rate of banks only. Isn’t it?

Mr. Positive Lal: Not necessarily. I am also awaiting monetary policy to be unveiled. I do not want to be disappointed by the monetary policies just alike to fiscal budget.

Mr. Prasna Lal: Oh, what kind of policies would you entertain?

Mr. Positive Lal: See, at this point of time, stock market has a higher supply of shares and the number of investors are constant. This means the policy should be inclusive to prospective investors as well. People who are not into investing should get an access to NEPSE.

Mr. Prasna Lal: Do you mean the investors outside Kathmandu valley?

Mr. Positive Lal: Yes, opening branches outside Kathmandu valley, a professional and efficient brokerage services and online trading. All these are the signs of development of stock market which can increase demand of stocks.

Mr. Prasna Lal: Will you be investing once these developments have taken place?

Mr. Positive Lal: No, that will be too late. Once these developments are fulfilled, the market will be in bullish trend and I won’t be able to profit much. So, I will invest before these developments take place and sell once we reach the bullish point.

Situation 2:

This month i.e. August, I visited the broker house once again. Coincidently, I came across the same investors. Scenario had been changed within this short span of time. The interest rates of banks are declining in terms of both loans and deposits.  The monetary policy has been unveiled. The testing process of online trading has initiated. The excerpt of the conversation of these investors after the decline in interest rate is provided below:

Mr. Prasna Lal: Did you see the banks are now decreasing the interest rates?

Mr. Positive Lal: Yes, commercial banks have lowered the interest rate a lot. Banks have started announcing new interest rates. In fact, even NABIL Bank announced interest rate of 8% on Fixed Deposit while they were promoting 10.5% interest rate until few days ago. NIC Asia has slashed interest rate to 5% on all schemes except one.

Mr. Prasna Lal: Yes, I read the news.

Mr. Prasna Lal: Do you think institutional investors will enter the market any time soon?

Mr. Positive Lal: Yes, the index has declined a lot now. The institutional investors can enter the market any time soon. Commercial banks have slashed the interest rate so, these investors do not have huge return from the deposits as well.

Mr. Prasna Lal: Yes, exactly. So, isn’t it the right time to invest. Everything is in favor. Isn’t it?

Mr. Positive Lal: Yes, everything is in favour. But, I am not still sure about initiating investment.

Mr. Prasna Lal: Why? Are you not satisfied with the unveiled monetary policy?

Mr. Positive Lal: No, that’s not a problem. It’s just that the margin lending has been decreased to 25% from 40% of the core capital. There are positive aspects as well. The margin call proportion has been increased to 20%. Even commercial banks have been permitted to open brokerage facility. The existing brokers have already been encouraged to open branches in rural areas.

Mr. Prasna Lal: Does this mean new prospective investors are being encouraged to enter into the market?

Mr. Positive Lal: Yes, the day is not far away when demand will meet the supply.

Mr. Prasna Lal: So, should we not start investing to attain profit after the demand and price increases?

Mr. Positive Lal: Yes, we should. But I am observing.

Mr. Prasna Lal: Observing what? The reports? Anything wrong with the reports published so far?

Mr. Positive Lal: Of course not. www.sharesansar.com published article entitled “National Development banks far cheaper than expected” where P/E ratio of all the banks are lower than 15. These banks are the best buy right now. Even in case of commercial banks, Everest bank has outperformed with an increase of 35% in net profit. Siddhartha Bank has increased profit by 19.99%. So, I think all is well.

Mr. Prasna Lal: Any plans on which banks to invest at the moment?

Mr. Positive Lal: Not really. This is the right moment to buy the commercial banks stocks but I don’t have plans.

Mr. Prasna Lal: Why? Is there possibility of oversupply of the shares?

Mr. Positive Lal: No, unlike last two years, there are not many companies issuing right and auction shares in pipeline.

Mr. Prasnala: Then, is it because of the price? Do you think the prices are too expensive?

Mr. Positive Lal: No. NEPSE has been trading at 31 months low level at the moment. Many good companies’ prices have come below 52 weeks and more. There is no issue with the price. Since the market has lost so much already, the possibility is high that it won’t lose any further.

Mr. Prasna Lal: Any disturbance in online trading?

Mr. Positive Lal: No, the testing of the online trading has been started. Once the testing is accomplished, NEPSE online will be live. It will take about 2 months or so.

Mr. Prasna Lal: Aren’t we supposed to invest before this period?

Mr. Positive Lal: Yes, we are.

Mr. Prasna Lal: Why are you not investing then?

Mr. Positive Lal: Because nobody is…

The contrast between two scenarios reveal that investors who waited for positive changes in the Nepalese capital market are not looking forward for investment despite steps have been undertaken. Even the most optimistic and positive person such as Mr. Positive Lal might be discouraged to invest in a bearish trend. Investors like Mr. Positive Lal are waiting for other people to invest while investors such as Mr. Prasna Lal keep on asking questions without undertaking investment steps. An investor needs to be confident in the decision that one takes.

Ten major reasons can justify why an investor should invest in current Nepalese bearish market:

1. The inverse relationship between stock market and interest rate of BFIs suggest that the decreasing trend of interest rates on both savings and loans by banks and financial institutes can create a positive impact on Nepalese secondary market.
2. As a result of the provisions facilitated by the monetary policy such as access of foreign loans in Indian currency, ease of CRR and SLR, consideration of bond investment in CCD ratio calculation can further ease liquidity crunch in the banking system. Average CCD ratio of commercial banks is around 75% at the end of 4th quarter which was 78% at the end of 3rd quarter. This points out commercial banks have enough money in the banking sector.
3. NEPSE is already trading at 32 months low level with many companies’ price below 52 levels. Keeping this into consideration, the price of shares might not decline further.
4. The month from August is considered as one of the best seasons for investment. If NEPSE index is considered based on its performance since 2011, 50% of the time the index has closed higher than opened. Moreover, investors buy during this season and sell within the span of 12 months.
5. The companies have published their quarterly reports. Most of the listed companies especially banking and dev bank sector (leading sector of NEPSE) have outstanding growth in terms of business and net profit. Investors have estimation on how much return can they make from which scrip. Thus, the INDEX might further move in an upward trend.
6. There are not many companies in pipeline for the right and auction shares compared to last two years. Thus, the oversupply of the shares shall not lead to the decline in NEPSE index.
7. History has proved that technological break-through can bring unexpected growth in the stock market. Like 2065 bull was supported by the replacement of open outcry system by NEPSE Automated Trading System and 2073 bull was supported by introduction of Demat system in 2071. So introduction on online system in near future can bring unexpected growth in Nepalese stock market. The UTA of online trading is going on. As a result, many investors will get a platform for purchase and sell of shares. This can increase the number of buyers in the secondary market further leading to upward trend of NEPSE index.
8. The 13 mutual funds have a huge amount of cash piled in the bank. So, if the institutional investors enter the market with the huge chunk of cash, market is likely to take a reversal turn.
9. Most of the banks have been able to maintain the EPS even with the declining price range and PE ratio. This has made scrips of the banks to be perceived safer and attractive unlike before. Major financial ratios like Price to Earnings (PE), Price-Earning -Growth (PEG), Price to Book (PB Ratio) are at low level indicating the price of most of the listed companies are undervalued.
10. Recently unveiled monetary policy has permitted commercial banks to work as stock brokers. This is likely to deliver a professional brokerage services to investors and access of brokerage services in each and every nook of the country. Government is targeting 8% economic growth this year, means government and private sectors will make huge investment on economy this will directly or indirectly impact the growth of listed companies.

There is one reason that the article sums up for investors not willing to invest:

1. Nobody is investing and neither will I.

The choice to invest or not completely relies on the hand of the investor. However, one cannot let go the popular quote by Guru Warren Buffet “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.

THE CHOICE IS ALL YOURS!