Extensive NEPSE Analysis For August 2023

The month of August has always been a scary month for the NEPSE investors. Three out of four market peaks have formed in August, in 2008, 2016, and 2021, and the bull markets have ended following a long and saddening bear market. Of course, we can make money in the corrective upward swings but we all can agree that the real money is made during the bull market only. Despite having a short-term bearish opinion in the market, I am very optimistic about the bullish market because I enjoy the bullish market more than I want the bearish market. The purpose of this extensive report on NEPSE for August 2023 is educational only and the readers are advised to not make decisions about transactions based on this report.

Executive Summary

This research report contains an analysis of NEPSE based on the macroeconomic and geopolitical factors that can gravely affect the market. NEPSE closed at 1990.59 index while making a high of 2124.32 and a low of 1985.10 in August 2023. In this report, I shall cover the factors that affected the performance of NEPSE throughout August 2023, including the latest monetary policy released for the new fiscal year by Nepal Rastra Bank.

Note: NEPSE stands for “Nepal Stock Exchange” and the NEPSE index tracks all the scrips listed in the Nepal Stock Exchange across 13 sectors.

Key Findings

1. Market Performance: I don’t think anyone was genuinely expecting a positive outcome of NEPSE for the month of August, other than permanent bulls with a Rs. 50,000 portfolio on a 40% overall loss. Even while considering the history of August, people should have been cautious. But here we are. The net loss in the month of August has been -5.49% in the overall index. In Extensive NEPSE Analysis For July 2023, I said that we should wait and watch in the month of August. Since the NEPSE index closed below 2033.43 in August, which was the low of July, we should expect the month of September to be negative as well. Looking at the international markets, September has been a lousy month during a bear market in the foreign markets. So, the bad market performance of the foreign markets in September can create a ripple effect in Nepal and it can hurt NEPSE as well.
2. Fundamental Analysis: The Q4 reports, as I had anticipated in the Analysis For July 2023, were not good. This holds true, especially for the real sector. Companies like Shivam Cements Limited (SHIVM) & Himalayan Distillery Limited (HDL) have reported a considerable decrement in their net profits. People say that commercial banks have good enough reports but I disagree. Let’s compare the Q4 reports of 2023 with the Q4 reports of 2022 and then let’s analyze the situation. I am sure the first thing you’d notice is an incremental rise in Non-Performing Loans (NPL). This is true for Commercial Banks, Development Banks, Finance, and Microfinance. Comparing Q3 reports to Q4 reports might not give us the analysis that we want to make a decision from a long-term investment point of view.
3. Technical Analysis: Technically, the market is in the control of the bears. Many people were optimistic when the market bounced back up from the low of 2000.23 on the 9th of August 2023 as the market rallied up to 2094.04 until the 14th of August, 2023. Many people shared positive sentiments as the market was moving upwards with a promising sign of improvement as the volume was steadily rising. However, it turned out to be a relief rally. NEPSE went on to break the low of July 2023 on a closing basis. Then, the direction of the market for September 2023 was crystal clear to me. My forecast for September is that we will slide further down. There will be small relief rallies every now and then but the primary trend for September is downwards.
4. Market Sentiment Analysis: Surprisingly, many people with a bullish point of view have turned bearish in the month of August. There are many people I look up to when it comes to the analysis of the markets and they now share the same view as I do. It created a sense of doubt for me. This is because if everyone is bearish, the market shocks everyone and begins a bullish journey. However, I also know that the market only bottoms out during extreme fear and I believe everyone is optimistic about the “support” of 1800. Maybe, this support is not strong enough for this fall. The people with a Rs. 50,000 portfolio on a 40% overall loss who used to tag me on Twitter to harass me when the market was at 2200 are now in hiding.

Recommendations

1. Long-Term Outlook: There will come a time period when NEPSE will remain sideways for a very long time, maybe even a decade. But it is not coming anytime soon. So, before the NEPSE plateau, we should begin investing. The growth is real and the future of our index for the next ten years looks solid. I believe we will plateau after our index rises above 12,000. At this point, the index wouldn’t make much sense. So, invest in great publicly listed companies with strong balance sheets and analyze your company’s financials often depending on your investing goals.
2. Risk Management: It is better to stay away from low-cap companies at this point in the NEPSE index. I say this because in 2019 before the market headed downwards before the bull market began, the highly volatile stocks of that time, Insurance companies, tanked to make a lower low in the individual stocks category while the NEPSE index bottomed out with a double bottom. So, if history is to repeat itself, we should be careful with our holdings in Finance, Hydropower, and Development Banks. I have been very consistent with this analysis.
3. Continued Monitoring: Since there is no way to tell where the market is heading, we should observe the market and the market participants if their collective sentiments change with time. But I believe the overall market performance for the month of September is obvious and it is going to be a downward market. This is especially true as the market in August 2023 closed below the low of July 2023. Some sectors are riskier than others.

Market Overview of NEPSE

1. Market Performance: The performance of NEPSE in August 2023 gave us a clear direction for September 2023. It’s a huge thing when a monthly candle breaks down the low of the previous month. So, we can expect September to be a bad month for the market. Also, the US markets have a bad history with the month of September, especially during a bear market. If the foreign markets are to shake up, we can expect NEPSE to shake as well. We were in the wait-and-watch position and so were most of the people I am close to. They have liquidated their holdings and now are firmly on cash. Although they are not expecting a lower low, I am.
2. Economic Factors (Based on Annual Data of 2022/23): The annual average Inflation remained at 7.74 percent which is normal in the context of Nepal. We might think it is a big deal, the range of 6% to 7% is very sticky but Nepal Rastra Bank seems comfortable with it. If we increase interest rates further to control inflation, our economy will collapse and if we want to ease up, we should tolerate inflation. The Imports and exports decreased by 16.1 percent and 21.4 percent respectively. In the previous year, 2022, imports increased 24.7 percent and exports increased 41.7 percent. The CD ratio stands at 83.69 and the interbank interest rate stands at 6.35%, which we once saw at 0.00% and I immediately called it “unsustainable.”
   
   In 2023, remittances increased 21.2 percent in Nepalese rupee and 12.1 percent in USD, which made a record of the most amount of remittance deposited into the Nepalese banking system. The gross foreign exchange reserves stood at USD 11.74 billion. This level of foreign exchange reserve is sufficient to cover the merchandise and services imports for 10 months in Nepal. Deposits at Banks and Financial Institutions increased 12.3 percent and private sector credit increased 3.8 percent. But this increase in credit is insignificant. The total deposits at BFIs stood at Rs. 5710 billion and private sector credit amounted to Rs. 4797 billion.
3. Investor Participation: People are now in a sentiment that goes like this: “I don’t care what happens to the market.” The confidence of investors is going down as the market slides down. Here, we can say the market is coming further down since the accumulation is not yet over on a large scale.
4. Regulatory Environment: Nothing much has changed in August from the regulators. The cap of Rs. 12 Crore stays intact, which was apparently beneficial for small investors and which only apparently affects the big investors. I hope, by now, people have realized the scale of a scam that was advertised to us by the regulatory body and by the so-called “market experts.” Also, the microfinance sector has been suggested to go into a merger, which is the reason why this sector does not look as attractive to me for now. Everything else remains the same as that of July 2023. The interest rates for the month of Bhadra increased, which was shocking to me. Things do not look good.
5. Market Liquidity and Trading: The volume for August 2023 is Rs. 38.307 Billion while the volume for July 2023 was Rs. 70.268 Billion. We can say that market participation is decreasing steadily. There is no charm in the market and I believe the situation will remain the same until November 2023.
6. Market Risks: I have been very consistent about the market risks. Usually, before the American economy enters into a recession, the oil prices will move up. Now, the price of Crude Oil is the highest in the last ten months. We should not expect the price of oil to drop until the FED decides to cut interest rates. Before they cut rates, they will hold the interest rate after it peaks for as long as possible. As the FED cuts interest rates, investors begin to doubt if something is seriously wrong that the FED is willing to cut rates. Then, the US markets fall off. As the US markets crash, this will create a ripple effect all over the world, which might as well bring NEPSE below 1800.
   
   Other risks are consistent with the July 2023 analysis. There are a few companies that people suspect will go bankrupt, it is better to stay away from such companies. Also, many businesses are closing down in Nepal and many more will close after Dashain. I am expecting a widespread fear about the Nepalese economy, which is when we enter the market. With rising Oil prices, we can expect inflation to rise again.
7. Market Outlook: The risk has increased significantly for September and we can only assume what will happen in October after observing the market performance in September. Will they raise interest rates for the month of Ashoj or will they cut or will they hold? There are many questions. Let’s hope for the best.

Conclusions and Recommendations

In conclusion, the month of September does not look good since our basis for September was if the market closes below July’s low in August, we can expect a bad market performance in September. So, in my personal view, the market will slide further down in September. The forecast for October 2023 can only be made after we observe the market performance of September.

Assumptions and Limitations of the Analysis

1. Personal opinion in expecting a bad market performance in September.
2. Personal speculation in “Market risks” about the rising oil prices, which can increase our inflation.
3. Personal speculation in “Market risks” about the businesses shutting down, which can increase fear amongst investors.
4. Personal speculation about the US economy entering into recession.