NEPSE Outlook: Practicality Over Principles, Psychology, and the Power of Liquidity

A rational investor focuses primarily on protecting the portfolio during adverse market conditions. In investing, certain situations resemble trying to catch a falling knife or grabbing a balloon that has already been released into the sky. Both actions are extremely difficult and carry significant risk. Therefore, the investment process must remain disciplined and well-controlled.

The stock market should not be viewed as a gambling arena where one attempts to pour in a pocket full of money and walk away with a trunk full of profits overnight. Such a mindset often leads to impulsive decisions and unnecessary risk. Once an investor moves beyond this mentality, participation in the stock market gradually evolves into a long-term business rather than a speculative activity. With time, investors become more mature in their decision-making and strategies. In this journey, both experience and knowledge play a crucial role in shaping sound investment practices.

During a bull market, even a first-time investor often experiences satisfaction and confidence as rising prices create the appearance of success. However, this initial optimism does not necessarily indicate a deep understanding of the market or long-term participation in the investment process. In many cases, the profits remain only as figures displayed on a calculator or trading screen rather than realized gains. The timing of exit plays a crucial role in converting notional profits into actual returns. Unfortunately, investors frequently misjudge this timing. When the market moves adversely, the anticipated gains can quickly disappear, much like pressing the “AC” button on a calculator that wipes away all previously calculated figures. Ultimately, the timing of both entry and exit is largely shaped by an individual investor’s perception and interpretation of the market and the specific stock involved.

While it is often emphasized that investors should focus on fundamentally strong stocks, develop sound financial knowledge, avoid rumors, and control the fear of missing out (FOMO), these are largely principle-based statements. They represent established truths about investing. However, acknowledging these principles is only one part of the equation. The more critical question lies in their practical application and the process through which they are implemented. In real market situations, human psychology does not operate within a single philosophical framework.

Instead, it is influenced by a range of factors, including emotions, perceptions, and external stimuli. These elements often shape decision-making as much as, if not more than, theoretical investment principles. For this reason, fair and effective participation in the market requires constant awareness and mental clarity. Investors must remain attentive and disciplined, keeping their judgment sharp while observing market movements. Ultimately, what an investor interprets from the trading screen often becomes the most immediate and influential factor in shaping investment decisions. 

Nepal’s stock market, particularly the NEPSE, is often influenced more by political signals and heuristic-driven reactions than by underlying economic fundamentals. Statements made casually by political figures or market influencers can quickly trigger short-term fluctuations in market sentiment. Even a brief comment or speculation can lead to immediate buying or selling pressure among retail investors. In such situations, many market participants tend to react impulsively rather than evaluate the broader economic context. Decisions are frequently made under the influence of herd behaviour, with investors following prevailing market sentiment instead of assessing key fundamentals such as corporate performance, macroeconomic indicators, liquidity conditions, and overall money supply in the financial system.

These sentiment-driven movements, however, are usually temporary. As the initial excitement fades, retail traders often find themselves exposed to heightened volatility and market corrections. During these periods, larger and more informed investors are able to capitalize on mispriced assets and accumulate positions at favorable valuations. This dynamic creates a recurring pattern in the market: short-term enthusiasm driven by speculation and collective behaviour, followed by consolidation that benefits more strategic participants. As a result, a significant proportion of retail investors struggle to achieve consistent returns, and it is commonly observed that a large majority of participants ultimately incur losses due to emotionally driven trading decisions rather than disciplined investment strategies.

According to the seven-month macroeconomic data (ending mid-February) of FY 2025/26 published by Nepal Rastra Bank, deposits at Banks and Financial Institutions (BFIs) have shown a notable expansion. Total deposits increased by 6.0 percent, equivalent to Rs. 433.71 billion, reaching Rs. 7,697.59 billion during the review period. This growth is higher compared to the 3.8 percent increase (Rs. 245.34 billion) recorded during the corresponding period of the previous fiscal year. On a year-on-year basis, deposits at BFIs expanded by 14.9 percent as of mid-February 2026, indicating improved liquidity within the banking system.

Remittance inflows have also registered a substantial rise during the same period. Total remittance inflows increased by 39.8 percent, reaching Rs. 1,261.01 billion in the first seven months of FY 2025/26, compared to a 7.5 percent growth recorded during the corresponding period of the previous year. The strong inflow of remittances continues to play a significant role in supporting domestic liquidity and financial stability.

Similarly, Broad Money (M2) expanded by 5.9 percent during the seven-month macroeconomic data (ending mid-February) of FY 2025/26, compared to a 4.4 percent increase in the same period last year. Broad Money refers to the total money supply available in the economy, including both currency in circulation and deposits held within the banking system, which can be converted into cash with relative ease. The growth in M2 reflects the overall expansion of liquidity in the economy, supported by increased deposits and higher remittance inflows.

These economic indicators suggest that liquidity conditions in the economy remain relatively strong, which serves as a significant catalyst for strengthening bullish sentiment in the capital market. The expansion in deposits, robust remittance inflows, and growth in broad money collectively indicate ample funds in the financial system, some of which may gradually flow into investment channels such as the stock market.

Nevertheless, global economic developments are likely to influence domestic economic activity, particularly through their impact on market psychology. Such external factors can affect inflationary pressures and, consequently, the purchasing power of consumers.

Overall, the current condition of Nepal’s capital market appears relatively favorable, supported by improving liquidity and growing expectations of greater political stability. This optimism is further reinforced by the anticipation that a stable political environment will facilitate the formulation and implementation of more effective economic and financial policies in the period ahead.

Author: Bibek Panthee