How Does Speculation in the Market Change the Trending Sector?

The annual trading report from the Nepalese stock exchange for the English financial year of 2007/08 gives us an idea of what the market was like during 2007/08. In the annual report, we can see that the total market capitalization of listed shares was Rs. 366.24 billion. Then, the market capitalization of the commercial banks had touched the mark of Rs. 259.55 billion, which is a staggering 72% of the total market capitalization.

The glory of the Banking Sector:

With the central bank's directive to increase the capital base of banks and financial institutions, the market value of the banking sector skyrocketed. Most of the companies opted to issue the right shares and bonus shares to increase their capital base. This attracted a lot of investors to invest in the banking sector. Sadly, this triumph of the banking sector has been lagging these days. The market values of Nabil Bank Limited and Standard Charted Bank Limited were Rs. 6,700 per unit and Rs. 9,025 per unit respectively at their peaks as per the annual trading report for 2007/08. But this sector has been barely outperforming the NEPSE index since the bull of 2012. Where did the old glory of the banking sector go? This is the question of every single one of us. Today, I will justify it with my perception.

The glory of the Insurance Sector:

The fresh new bull that started in 2012 and ended in 2016 outshined the old banking giants. We could see a completely new sector, the insurance sector, taking the lead in the market. The companies like NLIC and PIC rose from the unadjusted price of Rs. 558 to Rs. 5,760 and Rs. 126 to Rs. 2,560 respectively from 2012 to 2016. However, the adjusted rate of return for NLIC and PIC are 5,012.92% and 3,543.07% from 2012 to 2016, i.e. 51 times and 36 times approximately. Today, however, this glory of the insurance sector has been outshined by different sectors such as the Finance sector, Development Bank sector, and Hydropower sector. Why does this happen? How does the mass preference for a trending sector change? Why do some people live in the old glory days of the banking sector with the hope that this sector will take the lead in the future?

Analysis:

From various market and business cycles, I understood that the market operates in a simple fundamental, i.e. supply and demand. From 2004 to 2008, the banking sector was leading the market primarily because of the central bank's directive to increase the capital base of banks and financial institutions. Their aggressive business growth fuelled by the increasing remittance and increasing deposits helped their stock value to rise significantly. From 2012 to 2016, the Insurance sector was not divided into two sub-sectors, i.e. Life Insurance sector and the Non-Life Insurance sector. When you divide the Insurance sector into two parts, the market capitalization of the insurance sector is significantly lower than the other sectors in the market. With our simple rule, i.e. supply and demand, there was high demand in the sector with a low supply. Since the Insurance sector had the least supply, the glory of the Insurance sector began.

However, the trend was still in favor of the Banking sector until the NEPSE index crossed the high of 1175.38 made in 2008 because of the rise in the Banking sector. After the NEPSE index crossed 1175.38 in 2015, we could experience a significant rise in the value of the Insurance sector up to 2016. Their business growth was fuelled by the earthquake in 2015 as everyone began to pay premiums for the insurance policy they preferred as a protection against the risk factors. Then, from 2019 to 2020, the insurance sector took the lead until the NEPSE index broke the all-time high of 1888.36 made in 2016. Now, completely new sectors were about to trend and that is the Finance sector, Development Bank sector and Hydropower sector. The market capitalization of these sectors was comparatively much lower than that of the Insurance sector and the Banking sector. So, from 2020 to 2021, these three sectors are trending.

Is the History Repeating Itself?

From the analysis above, we can see that the trending sector changes after the NEPSE index breaks the previous all-time high. Our current all-time high is 3227.11 (Intraday trading) and if history repeats itself, the Finance sector, Development Bank sector, and Hydropower sector will take the lead until the NEPSE index breaks the all-time high. Then, our preference will change towards the sector with the least supply, which would most likely be the Microfinance sector and the Insurance sector. However, insurance companies are hesitant to increase their capital base by issuing the right shares or bonus shares. They are in a process of merging which freezes the trading of these companies.

So, people are less likely to risk their capital by investing in a sector that is undergoing a merger process. So, the sector preference would most likely be the Microfinance sector until the risk of merger goes away in the Insurance sector. Then, the supply of the Insurance sector will be the least after a while. When the risk of a merger decreases, people will flock to the insurance companies and an index bubble will form. People will experience intense Fear of Missing Out (FOMO) and buy when the market is peaking. Then, we will experience another bear market. But this is true if history repeats itself.

Conclusion:

This history of NEPSE is the reason why I do not believe in a good company, bad company, undervalued company, and overvalued company. I was very vocal about being against the red list of 51 companies which was published by SEBON when the market was at 3,064.07 because their understanding of the market is completely different from my understanding of the market. It is up to us, the investors, to justify the value of the market and not the policymakers. The Banking sector was a speculative sector from 2004 to 2008 and now the Banking sector is a blue-chip sector.

Similarly, the Insurance sector was a speculative sector from 2012 to 2016 and now, the Insurance sector is a blue-chip sector. Likewise, it is highly probable that the current speculative sectors will turn into blue-chip sectors as well in the coming days. This is how our market has been operating for a very long time. However, just because the market has been following a certain pattern to this date, it doesn't mean the market will continue to follow the same pattern. The market is highly unpredictable and to be 100% ascertain about the market movements is absurd and, frankly, impossible. It is advised that you do your research and not take this as financial advice. This article is simply for educational purposes.

Disclaimer: This article is accurate and true to the best of the author’s knowledge. Investing can be risky and it can turn out to be hazardous as we grab the wrong notion of investing. So, do not take this article as financial guidance. Always consult a licensed CFO or portfolio manager for your particular investment plans and financial goals.