Extensive NEPSE Analysis For June 2023

The month of June 2023 has been extraordinary, loving the market experience personally. In late May 2023, the investors were in confusion regarding the new tax provision stated during the budget announcement for the fiscal year, 2023/24. However, from the 1st of June, 2023, the Nepalese investors and the Government of Nepal came to terms with the taxation of Capital Gains Tax (CGT), leading to an upward rally for the whole month of June, with a 16.28% rise of the NEPSE index. I will add my personal view at the end of this article. The purpose of this extensive report on NEPSE for June 2023 is educational only and the readers are advised to not make decisions about transactions based on this report.

Executive Summary

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

Key Findings

1. Market Performance: The NEPSE index has shown strong performance in June, with an overall 16.28% increase in value across 13 sub-indices. This can be attributed to extreme fear in the month of May regarding the SHIVM scrip, increased investor confidence, the expectation of good corporate profits in the hotel subindex, and the expectation of Budget Approval from the Parliament.
2. Fundamental Analysis: Hotels and Insurance sectors within the NEPSE index have demonstrated robust capital gains, with high ‘expectations’ of revenue and earnings growth. Even though the Q4 reports are yet to be released, the corporate profit of Hotels can be expected to rise because of the rise in tourist inflow in the country. The neutralized effects of COVID-19 on these sectors can be attributed as the factor supporting the current growth.
3. Technical Analysis: The NEPSE index has witnessed a notable uptrend, characterized by consistently making higher highs and higher lows. Key supply and demand levels have been identified and we have seen a good sell-off from a very strong supply level of 2200. The market is expected to experience a minor correction to shake off weak hands and then make a move upwards with an expectation of a favorable monetary policy. This can also be supported by the highest levels of public optimism in this rally.
4. Market Sentiment Analysis: Investor sentiment towards the NEPSE index remains rather optimistic. It was supported by the expectation of the Budget Approval news and increasing participation from retail and institutional investors. Social media sentiment analysis indicates a favorable yet adamant bullish sentiment overall, which is something to cherish as well as to be fearful of.

Recommendations

1. Long-Term Outlook: Considering the positive fundamental and technical factors, the NEPSE index is expected to continue its upward trajectory in the long term. Investors are advised to maintain a long-term investment horizon and consider exposure to fundamentally strong companies within the index. Investing across speculative assets in the current market is not recommended.
2. Risk Management: While the overall market sentiment is positive, investors should be mindful of potential risks, such as regulatory/ policy changes, geopolitical uncertainties, and market volatility. Implementing sound risk management strategies, including diversification and position sizing along with a cash position, is recommended.
3. Continued Monitoring: Given the dynamic nature of the stock market, regular monitoring of the NEPSE index and individual securities within the index is crucial. Keep a close eye on macroeconomic factors, market developments, and company-specific news to make informed investment decisions.

Market Overview of NEPSE

1. Market Performance: The market performance of NEPSE in June 2023 was outstanding. With a small correction in the overall index to no major corrections in a few sub-indices, NEPSE stands at 2150.99 at the end of the month. The market has shown signs of resilience and growth, with increased investor participation and trading volumes.
2. Economic Factors (Based on Ten Months’ Data Ending Mid-May, 2022/23): The CPI Inflation rate of Nepal stands at 7.41% year to year basis. We should factor in the 15.9% trade deficit as both imports and export have decreased by 16.8% and 24.5% respectively. The remittance inflow has increased by 13.4% in terms of USD and 23.4% in terms of NPR. As a country heavily dependent on the remittance inflow, Nepal’s economy survives on the export of extensively skilled human manpower. On a year-over-year basis, the deposits in BFIs have increased by 11.4% and credit outflow to the private sector only increased by a mere 3.1%, which means the private sector is reluctant to take loans at higher interest rates. The Asian Development Bank has approved a $50 Million dollars loan to Nepal.
3. Investor Participation: After an extensive accumulation by smart money and institutional investors, the hotel and the overall insurance sector have rallied massively. However, during the later stages of the rally for June 2023, heavy retail participation is observed. But at the supply level of 2200, a minor profit-taking session is observed for June 2023.
4. Regulatory Environment: An uncertainty lies with the topic of the issues raised by the recent Budget Announcement in late May with regards to Capital Gains Tax (CGT). Until and unless the later agreed-upon policy is not updated in the Income Tax Code 2058 of Nepal, there is room to speculate on the uncertainty that lies with this tax provision. Also, we are uncertain about what the new monetary policy holds to boost investors’ sentiments. However, judging by the governor’s recent public appearances, he wants to shrink the flow of capital. So, the monetary policy can be expected to be contractionary, which is to speculate on the bad side of the market.
5. Market Liquidity and Trading: There have been huge fluctuations in Interbank Interest Rates from the rates dropping to an absolute 0.00% to 5.11% within a day. This is because the Reverse Repo isn’t generally a good tool to shrink the flow of capital at 3-4% when there is excess liquidity in the market as it becomes expensive for Nepal Rastra Bank (NRB), which is the central bank of Nepal. The system is generating Rs. 7-9 Billion every single day and it is difficult to shrink the money supply using Reverse Repo at 3-4% bid of interest rates. In June 2023, the turnover in NEPSE was Rs. 70.501 Billion, which is an above-average volume, indicating positive market participation.
6. Market Risks: We have to put the insurance coverage of the Hydropower companies that have become ‘Non-Functional’ because of the flooding, where the losses are speculated to be ranging from Rs. 8-10 Billion. The losses affect the net profit of the Non-Life insurance companies as well as Nepal Reinsurance Company. Also, a few more hydropower companies can be at risk of flooding, which further increases the liabilities of these insurance companies. Adding to the market risk, the monetary policy is very unpredictable because NRB has to deal with excess liquidity in the system as well as protect the economy from future uncertainties such as turbulent oil prices which can rise in the upcoming days because of the shrinking oil supply in the world, as OPEC+ nations have decided to cut oil supply as a part of their geopolitical game. Then, we should come to the BFI’s net profit for Q4, which the market doesn’t expect to be good because of the recession. Many businesses are shutting down and there might be a problem with loan repayment, which in turn could affect the BFI’s net profit.
7. Market Outlook: Despite the above market risks, we can assume that participation in July 2023 might be volatile at the beginning of the month. However, the market might rally from a strong demand zone, at least to the recent high, until the monetary policy. The uncertainty in the monetary policy will guide the market henceforth from August. Usually, NRB releases the monetary policy at the end of July or in mid-August. Let’s hope for the best.

Conclusions and Recommendations

In conclusion, we can be optimistic about the market for the upcoming month of July. However, in my personal view, the bearish view of the market for the next four to five months still stands. But if the NRB fails to shrink the money supply from the market and if they begin to slash interest rates in an unprecedented way, the bearish view of the market will flip bullish from my end. There could also be a change in leadership in the Government of Nepal in a few months, which is certainly a detrimental factor as the country will remain leaderless for some time. This uncertainty is also a bad factor for the market because as the bad news accumulates, the market goes down.

Assumptions and Limitations of the Analysis

1. Personal Speculation in the ‘Market Risks’ about the factors affecting corporate profits.
2. Personal Speculation in the ‘Market Outlook’ about the regulatory uncertainties.
3. Personal Speculation with my reason for the lack of credit flow to the private sector as well as the recessionary pressure in the economy.
4. My personal views in conclusion.