Extensive NEPSE Analysis For July 2023

The month of July is historically one of the most critical months for trading. I want to stress this point, history and charts don’t make the market, instead, the market makes history and charts. From 2001 to 2022, we have seen negative monthly closing for July only three times, i.e. in 2002, 2003, and 2018. Many of us were also hopeful for a positive closing for July 2023 since it is such an important month historically. However, it didn’t happen. So, there have been four negative closings on NEPSE for July in total. I will add my personal view at the end of this article. The purpose of this extensive report on NEPSE for July 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 which can gravely affect the market. NEPSE closed at 2106.18 index while making a high of 2244.13 and a low of 2033.43 in July 2023. In this report, I shall cover the factors that affected the performance of NEPSE throughout July 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: The market performance for NEPSE fell off expectations with overall negative performance as the index dropped by 2.08% compared to June’s closing index. Across 13 sectors, the Commercial Bank sector led the NEPSE index with a 3.70% overall rise than that of June’s index for the same sector. This is because Nepal narrowly escaped from entering FAFT’s grey list, which is an index of jurisdictions with weak measures to combat money laundering and terrorist financing (AML/CFT) in two FATF public documents that are issued three times a year. With almost every other major sector closing in negative, the Commercial Bank sector beat the market expectations for this very reason. We also have an easing monetary policy and I have discussed the new monetary policy below in the “Market Overview of NEPSE” section.
2. Fundamental Analysis: The fundamentals in the market have not really changed from that of June. Everyone is waiting for the Q4 reports, which will be released in August, and everyone is expecting the reports to be positive. Besides the ‘Hotels’ sector, my analysis says that the corporate profits in Q4 will decrease across all other sectors and the EPS will reflect the decrement of the corporate profits.
3. Technical Analysis: Even after breaking the demand zone of the 2044 index on July 6, 2023, the NEPSE index went back up following the speculation led by the release of the monetary policy. The market ignored the strong supply zone of 2205.97 and made a higher high on the very day the monetary policy was released on July 23, 2023, with a high volume and high retail participation. However, this bullish sentiment couldn’t last long enough as the selling began the very next day. Then, we could see five consecutive negative market closings for the next five days. My forecast for July was the market will reach at least the height made in June and it turned out to be true. So, for the month of August, I advise everyone to stay in a strong cash position as I do not have a forecast for August 2023. The market is yet to confirm its direction by either breaking the high of July for the bullish case or the low of July for the bearish case.
4. Market Sentiment Analysis: In July, the monetary policy played a vital role to boost retail confidence. As usual, most people are bullish despite the market indications being a little bearish for the month of August. This optimism is led by the Q4 expectations to be positive. However, I find the market to be unusually optimistic considering how many companies are struggling to pay their creditors. There is no data in this section because here I talk about “sentiments.” Many shops, including my favorite and trustworthy perfume store, have been closed and shut down in the heart of Kathmandu, i.e. New Road. I believe the Q4 reports will reflect the current market scenario.
   
   Social media sentiment analysis indicates a fluctuating stance of the people in the market. People get a cheap dopamine hit on a positive day and begin to slander everyone who holds a bearish stance. Then, they hide in their caves on a negative day. I have begun to reduce my interactions with people who only listen to what they want to read on social media. They want everyone to have a positive outlook in the market all the time despite the market showing worrying signs. My principle in the market is to listen to both the positive side and the negative side and then form my own opinion. You will never see me slandering people with bullish views despite their worrying tries to provoke me into dull-witted altercations just because I hold different opinions in the market than they do.

Recommendations

1. Long-Term Outlook: As usual, the long-term outlook for NEPSE looks very strong. Despite the market performance, long-term investors should buy into the market slowly and steadily. Our market will begin a bullish run soon enough, likely before the end of the year 2024. So, invest in the companies with strong balance sheets and check the news related to the companies you’re invested in once every fortnight.
2. Risk Management: As I said in the ‘Technical Analysis’ section above, I suggest everyone stay in a strong cash position to take advantage of the falling prices. There is a popular saying, “Don’t try to catch the falling knife.” Let the market fall and when it stabilizes, then take positions in the market. If you want to stay invested in the market, invest across all sectors, including mutual funds.
3. Continued Monitoring: Since there is no clear indication of the market direction yet, we should be monitoring the market continuously. A sudden expectation of good news or good corporate profits can impact the prices of stocks in the month of August. However, only take positions after the market confirms that the market has stabilized. The overall NEPSE index is bearish but some sectors are bullish.

Market Overview of NEPSE

1. Market Performance: The performance of NEPSE for the month of July was confusing. With no clear indication of whether or not the market follows the bullish trend, the index closed at 2106.18, which is 2.08% less than in June. The market participants are waiting for confirmation, i.e. will the market break the high of July or the low of July?
2. Economic Factors (Based on Eleven Months’ Data Ending Mid-June, 2022/23): The CPI Inflation rate of Nepal stands at 6.83% on a year-over-year basis. Imports decreased 16 percent, exports decreased 22.7 percent and trade deficit decreased 15.2 percent. Remittances increased 22.7 percent in NPR terms and 13 percent in USD terms, which has been a lifeline for the Nepalese economy. Deposits at BFIs increased 8.8 percent and private sector credit increased 3.4 percent. On a y-o-y basis, deposits increased by 12.2 percent and private-sector credit increased by 3 percent. The private sector is not yet interested to take credit for their businesses.
3. Investor Participation: It looks as if the big players got their perfect exit liquidity with the market performance on the day the monetary policy was released. However, many retailers entered the market because the monetary policy looks favorable. We shall talk more about the monetary policy below.
4. Regulatory Environment (Monetary Policy): The monetary policy was pretty simple and straightforward. Many people including myself envisioned the easing monetary policy to look like increasing the limit of Rs. 12 Crore to Rs. 50 Crore or another limit that looks reasonable. However, our Governor, Mr. Maha Prasad Adhikari, had different plans. He touched on the risk weightage for the disbursement of share loans and all of us were waiting for a circular explaining this 106th point of the monetary policy.
   
   Before the monetary policy, loans up to Rs. 25 Lakhs carried a risk weight of 100%, and the loan amount above Rs. 25 Lakhs carried a risk weight of 150%. In this monetary policy, this section was eased, and loans up to Rs. 50 Lakhs carried a risk weight of 100%. Of course, many people cheered for this, including myself. Then, people began to express their support for this change like they applauded the 4/12 rule back in August of 2021 because apparently “it only affects the rich.” Some people will never learn from the past. Yes, the governor has finally begun easing but remember, the limit of Rs. 12 Crore still exists.
5. Market Liquidity and Trading: The interbank interest rates stand at 5.83% and short-term interest rates stand at 5.32% as of August 1, 2023. The CD ratio is 83.16, decreasing of which suggests that there is high liquidity in the system but the banks have not been able to loan it out in the market. With a trading volume of Rs. 70.268 Billion on NEPSE, it is less turnover than that of June which was at Rs. 74.502 Billion.
6. Market Risks: The market risks are similar to that of June. I had talked about the risks of Hydropower projects because of the monsoon season as well as the risk to Insurance companies (both Non-Life as well as Re-Insurance Companies). Adding to the risk, one side of the market does not believe that the easing monetary policy has eased enough for big investors to invest 100% of their capital across NEPSE.
   
   The rising oil price and rising interest rate in the United States pose a greater threat to liquidity in our existing economy, which might instill fear among investors. We love to argue how the American economy doesn’t affect Nepal but more often than not, we always follow major crises in the United States since we trade in dollars. The FED increased the interest rate by 25 basis points following difficulty in bringing core inflation down, which I had speculated before FOMC. Whenever the dollar is affected, so is our economy. We do not have the luxury of cheap oil as our immediate neighbor, India, does.
7. Market Outlook: Despite the above market risks, we can assume NEPSE will make a decision in August 2023, either to continue the bullish uptrend or to continue the bearish downtrend. We might see a few small relief rallies in between if the market follows a downtrend. The decision in the monthly candle made in July will lead the market henceforth.

Conclusions and Recommendations

In conclusion, we should wait and watch the market for the month of August to see if it breaks the high of July or the low of July on a closing basis. In my personal view, certain sectors have bottomed out already but the leaders of the 2021 bullish market have not yet bottomed out, which could drag NEPSE down along with them. My major entry into the market will be after the next monetary policy review, provided that the review eases the monetary policy further.

Assumptions and Limitations of the Analysis

1. Personal opinion in the “Market Sentiment Analysis” section about investor behavior on social media.
2. Personal speculation in the “Market Risks” section about the oil prices.
3. Personal speculation in the “Market Risks” section about the easing monetary policy not being favorable yet.