Index Outlook: Are We Poised for Next Bull Run?

Fri, Dec 30, 2022 9:41 AM on Stock Market, National, Exclusive,

Are we poised for next Bull Run?

Nepal’s stock have been in a striking rally since 15 months. Over the period, the secondary market hit all time high record of 3198.60 points on August 18, 2021 whereas it plunged to as low as 1848.28 points on June 23, 2022. From peak to low, the index lost almost 42.21% of its whole market capitalization. Likewise, wealth of individual investors also eroded in same mark provided that they have very low fundamental stocks in their portfolio and have not sold their penny stocks till date. A loss of 20% or more in a major stock market index over a sustained period is what experts consider to be a bear market, and the opposite is true for a bull market. Technically speaking, the Nepalese stock market has entered a bear market, according to experts' estimates and references to the nation's economic situation. Market indices constantly provide a new high and low point in the history of that particular market, whether it is a bull or a bear. The market index is used as a benchmark by both individual and institutional investors to measure how well their respective portfolios have performed.

Stock Market is always fight between bull and bear because bull markets are always fueled by optimism whereas bear market driven by pessimism. According, to an American famous writer William Feather “one of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute”. Market will never decrease if investors don’t sell their stocks in panic and market will never grow if they buy with courage. A place where there is no buying and selling, it cannot be called as an effective market. The beauty of stock market is its volatility that the stock prices doesn’t always continuously spike and constantly fall. On any given day it’s pretty much a coin toss what markets will do, that’s why investors and traders must be able to embrace themselves for volatility. It’s a function of human nature that cannot be changed overnight. Discard the received dogma that volatility is risk. Whilst most intelligent investors trumpet this opinion, the great investors have recognized the beauty in volatile prices, they can present and see attractive entry points which ordinarily don’t surface in most markets and normal investors overlook such situations. Market volatility especially in bearish market is the friend of the long-term investor which is considered as Investment Mantra.

As discussed earlier, this year has been a very painful year for the investors as share price nosedived. Yes, agree with the fact that sustained or sharp declines are bound to make investors really uncomfortable while they’re happening. People who have borrowed money from family members, taken out loans with higher interest rates, or set aside extra cash for home expenses and necessities are particularly affected. Investment values often fluctuate on the stock market. Rather than running away from the market if the value of the stocks drop investing requires patience while it’s not unusual to lose money in the short term. There is a famous saying that stock market is a place transferring money from impatience to patience investors. Although it is simple to state, it can be difficult for a novice to comprehend those who have tapped into the market's buzz without comprehending the market's fundamentals and without seeing someone making money. Similar to how many are lured by the simplicity of online trading and the appearance of higher returns.  Evidently, one must be clear on the opinion that financial markets is a beautiful place to build wealth over time. Yet, the prospect of getting rich quickly is luring tens of thousands of newbies into stock market speculation. Going forward, most of these newbie speculators lost big chunk of money in the roller-coaster market. 90% of inexperienced investors suffered losses in the market, although many of them have already quit for good, while successful investors departed the market after making profits.

In the present scenario, market is hovering around sideways, it isn’t inspiring confidence in investors. Still, a small portion do plan to take advantage of recent price dips with the hope that the market will witness gradual recovery in the near future. Many naive retail investors who have chosen the route of market speculation in the aim of swiftly becoming wealthy as well as other investors who were caught in the bull run are anxiously awaiting a steady increase and market revival. Since it is difficult to predict when a market will bottom, savvy investors have pulled their money out of bull markets and are holding onto it until the trend changes and prices start to fall again.

Will the market remain sideways? Or will it break lowest 1848.28? Or are Investors desperately expecting for the next bull run to happen? These questions are really difficult to answer. But, to some extent, we can perform intelligent guessing for identifying that the market will revive. Generally, it can take anywhere from few weeks to several months or years for the market to start recovering. Here, are few reasons why the market will revive and investors may have another opportunity to embrace next bull run.

Firstly, interest rates and liquidity are the primary factors driving the stock market. High liquidity flow and low interest rates fuel the stock market to rise and vice-versa. Banks are promising to pay around 13% of fixed return to the depositors by citing the reason of liquidity crunch likewise, banks have increased interest rates on loan as high as 18%. Due to this reason, private sectors have been panicked by the excessive hike in interest rates which is definitely not creating a congenial environment to do business by taking loan from the bank and making investment even in productive sectors. Rather, an investor can play safe by depositing amount in FD instead of taking risk. Similarly, the existing amount of loan-able funds with commercial banks is significant around more than 165 Arba which is in the freezing state further pushing very low demand of loan-able funds. It can be observed, that there is no space for further interest rate hike rather commercial banks may review the existing interest rates on deposit and loan as liquidity of banks are improving. Yet, interest rate may not plunge to single digit from double digit overnight but revision in interest can be expected.

Secondly, with companies started declaring dividends to their investors while few are left to declare market may witness growth if remaining companies declare attractive dividends. Additionally, when a company declares a dividend, it is typically seen as a sign of good financial health of a company and stability, which can increase investor confidence in the stock. Similarly, around 70-75% of the total market capitalization of NEPSE is covered by bank and financial institutions in Nepal followed by insurance companies, hydro power, investment, manufacturing & processing and hotel industries. Since, NRB has been flexible in removing the ceiling of the cash dividends that the banks and financial institutions has been providing to their shareholders along with other sector companies are also more focused on giving cash dividend to their investors which may help in raising market. When a company issues bonus shares, it increases the total number of shares outstanding. This increases the supply of the company's stock, which can lead to a decrease in the stock's price. This is because when the supply of a stock increases, the demand does not keep pace, and the stock price can decrease as a result. Additionally, the company's earnings per share (EPS) are diluted into more shares, which can reduce the earning per share and lead to a decrease in the stock's price. Therefore, cash dividends are generally more effective in raising stock market value than bonus share.

Thirdly, Government and NRB trying to curve the real estate business is really a positive signal to stabilize the economy. The stop investment policies on real estate was brought on time. If we look at the trend of past one decade, investment in real-estate has been returning mammoth profit with zero risk. Even though infrastructure is very poor, the value is doubled tomorrow without any genuine reason. Moreover, the real estate business has come to a cessation across the country with the government decision to classify land and business is declining. Thus, it is possible that the money would be diverted to the stock market. Investors, may decide to move their funds to the stock market if they believe that the stocks offer a better opportunity for growth than real estate. The downtrend of real estate business may help investors siphoned off their money to stock market.  

Fourthly, Securities Board of Nepal (SEBON) recently arranged reservations of IPO for foreign workers which is really welcoming. The aim of reservation arrangement is encouraging remittances to be sent to Nepal through formal channels as a result remittance inflows has also increased by 20.4% percent in the first four months of the current fiscal year compared to the corresponding period of the last Fiscal year. We can believe, that new arrangements will encourage Nepalese working abroad to invest in the domestic share market. This will result in an increase in the demand of Nepalese stocks, leading to an appreciation of the Nepalese stock market.

Likewise, the number of Demat account holders has been steadily rising. The retail investor participation in the equity market is really desirable. It enables investors to participate in wealth creation happening through the capital market. Similarly, as SEBON has moved forward its plan to license a new stock exchange company. Equally, Broker License to commercial banks in Nepal is under the way as preparations has already been started. In like manner, NRN investment and foreign companies and institutions are soon getting opportunities to invest in Nepalese capital Market. Analogously, Securities Board of Nepal (SEBON) trying to work out for bringing different kinds of instruments such as short selling and option trading will definitely add value in the capital market. Evidently, Bishnu Poudel has taken oath of Finance Minister which is his third stint. The history clearly shows that whenever Mr. Poudel became finance minister, the stock market of Nepal scaled new peaks. Matching, stock market has already welcomed newly appointed finance minister from the day of taking oath. So, above discussed issues could be the milestone towards the new journey of Nepse.

In a Nutshell, despite, being known that investing in equity market is considered as one of the most risky asset in the world, the reason why it is so captivating is lack of viable alternatives and one can easily make entry in the market with very minimum investment. Likewise, they are attractive from a comparative earning capacity point of view and can offset any kind of inflationary effect. The most important thing any investor can do to prepare for the next bull market is to maintain a long-term mindset, ignore the day-to-day noise and focus instead on the big picture. Successful investing requires the right attitude, perspective and planning, manage ones emotions, recognize and respect the power of compounding and exercise patience. The market has a history of attractive long term returns, all one need to do is step back to see its beauty. The stock market, as a whole, has tended to post positive returns over long time horizons and patient investors will reap the benefits out of it.

Disclaimer: The article is solely based upon the personal opinion of the author. The readers have complete right to agree or disagree in the opinion made by the author. Likewise, investing in stock market is subjected to market risk and it can be very painful if we grab wrong notion of investment. So, do not take this article as a financial guidance. Author is not responsible for the profit or losses incurred if buying and selling decision of stocks in the market is done through this article.  Moreover, wherever there is a potential for profit there is also the possibility of loss. If a person rigorously asks advice for the name of stocks to buy then he/she is never ever serious in investing.

Name: Binaya Nepal   

MBA Graduate South Asian Institute of Management (SAIM)