Extensive NEPSE Analysis For September 2023

First and foremost, my forecast for September went wrong. I had expected the market to close in the red from the perspective of a monthly candle. But this didn’t happen. Surprisingly, for the first time in two years, the September monthly candle has closed with a green candle. This is good for the market because people can cash in some money before two of our biggest festivals begin, viz. Dashain and Tihar. Dashain begins on the 15th of October, 2023, and ends on the 26th of October, 2023. The purpose of this extensive report on NEPSE for September 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 2004.30 index while making a high of 2040.28 and a low of 1929.66 in September 2023. In this report, I shall cover the factors that affected the performance of NEPSE throughout September 2023, including the latest circulars released 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: Ever since the bearish market began in August of 2021, the September monthly candle had always closed with a red candle, both in 2021 and in 2022. However, this time, in 2023, the September monthly candle has closed in green. The net profit in the month of September has been +0.69% in the overall index. Despite the overall positive sentiment, the volume, however, was the lowest in the last three months, with a turnover of only NPR 24.625 Billion. In Extensive NEPSE Analysis For August 2023, I said that we should stay fearful as the monthly candle for August broke down the low of July. However, even though there wasn’t much strength the market moved upwards from the 10th of September, 2023. Now, we are in the same dilemma as we were in August.
2. Fundamental Analysis: There hasn’t been much news with regard to the fundamentals of the companies. We all know that the real sector is suffering and the job market is suffering. The fundamentals of the market however have changed a little. There has been excessive issuance of IPOs and many more are yet to come. I accept the issuance of the IPOs and I encourage more companies to get listed on NEPSE. But we should also understand that, with increasing IPOs, the supply of the market also increases. The market participants do not yet have the level of liquidity to absorb all the supply coming from the IPOs. Today, the situation is almost similar to the previous bear market where excessive issuance of the Right Shares was carried out and today it’s the excessive issuance of IPOs. Both Right Shares and IPOs increase the supply in the market.
3. Technical Analysis: I wish to repeat the last sentence I’ve used here in the “Market Performance” section. We are in the same dilemma as we were in August. In August, we were unsure of what the market would do as the monthly candle for July was indecisive. It’s the same case for the monthly candle of September. Because of the breakdown of July’s low in August, I had anticipated the month of September to be negative. But not to my surprise, much speculative news surrounding the cap of NPR 12 Crore hit the market and people began speculating in the market. For the last three years, the month of October has closed with a green candle. However, ever since July closed with a green candle, the month of September which was usually negative closed with positive sentiments. So, the positive sentiments of October for the last three years may break this year as we are moving ahead with the one month of lag. If this is difficult for you to understand, please comment below, and I will gladly explain further.
4. Market Sentiment Analysis: The Big Money did not seem interested in entering the market in September of 2023. Despite the speculative news of the NPR 12 Crore cap, the volume remains the lowest in the last three months, closing with a turnover of only NPR 24.625 Billion. This shows that the market had more retailer participation. As usual, such speculative news divides people. The finance minister tries to come clean and his party’s cadres begin to bash the current Governor of Nepal Rastra Bank, Maha Prasad Adhikari, as there is a rumor that the Governor is affiliated to the opposition party. Even the previous Finance Minister as well as the Governor of Nepal Rastra Bank, Dr. Yuba Raj Khatiwada attacked the current Governor while he had similar restrictive policies against the Nepalese Stock Market.
   
   Let’s talk about the underlying hypocrisy here. Former Governor of Nepal Rastra Bank & former Finance Minister, Dr. Yuba Raj Khatiwada says: “कुनै व्यवसायीलाई एक खर्ब ऋण दिँदा जोखिम नहुने, कसैलाई १२ करोड दिन जोखिम हुने?” When NEPSE was around 1280 in 2019, Dr. Yuba Raj Khatiwada restricted margin lending to 65% by keeping shares as collateral in 2019. The governors adopt to amount restriction with the CD ratio standard and they adopt to % restriction with the CCD ratio standard. During the time of Dr. Yuba Raj Khatiwada, there was a CCD ratio standard, which therefore imposed restrictions based on %. Today, there is a CD standard, which therefore has imposed a restriction of NPR 12 Crore for margin lending against shares.
   
   With the reference from ShareSansar, the provision of margin lending restriction was at 60% in 2015 and Dr. Yuba Raj Khatiwada was Governor of NRB back in 2015. Then, it was reduced to 50% in 2016 and then the market peaked at 1800 in 2016. The provision for margin loans against shares was decreased to 40% in 2017, then decreased to 25% in 2018. In 2018, Dr. Yuba Raj Khatiwada was the Finance Minister. Then, the provision for margin loans against shares was decreased to 65% in 2019 citing “fiscal imbalance” despite the banking system having excess liquidity at the time. Then, the Bull Market began in November of 2019. Dr. Yuba Raj has always been negative towards the stock market. Honestly, I don’t care who the Governor is and where he is affiliated to. But I agree with his current actions. I will explain more about this below in the “Market Risks” section.

Recommendations

1. Long-Term Outlook: For people with a long investment horizon, they should invest every single month. Select a good company from every sector and keep investing constantly every single month regardless of what the market does. Instead of giving your money away to Portfolio Management Services (PMS), you can manage your own money while saving the PMS fees. Do not follow the market predictions in any media because nobody knows if the market is going up, down, or sideways. As you can see, the first sentence of this article is about how my prediction for the month of September was wrong.
2. Risk Management: If you are neither a speculator like me nor a trader like most people on social media, the news should not matter to you. Please do not follow the news if you are an investor, especially if you cannot keep track of it. Keep investing every single month and in the next few years, your money will increase by two to three folds at minimum. However, people with a bit more ambition and risk tolerance must focus on the macroeconomic developments in the Global markets, which eventually influence us whether we like it or not.
3. Continued Monitoring: For now, there is no clear indication of what the market will do for the month of October. But since our market is one month behind the performance in the previous years, perhaps October won’t be a green month. However, if the market breaks September’s high of 2040.28, we can get optimistic for the month of October. Likewise, if the market breaks September’s low of 1929.66, we can expect the market to slide below. But because of Dashain, we can expect the volume in the market to get unreasonably low as people leave Kathmandu to go back to their home districts in Dashain.

Market Overview of NEPSE

1. Market Performance: The performance of NEPSE in August 2023 gave us a clear direction for September 2023. But it turned out to be a wrong indication as the month of September closed with a green monthly candle. People close to me have taken advantage of the recent small corrective rise and they have liquidated their holdings. Also, the foreign markets, including the Indian market, are sliding down, which affects Nepal as well since our economy is dependent on the reserve of foreign currencies collected from remittance and the strength of these currencies. This very well justifies the tight policies of Nepal Rastra Bank.
2. Economic Factors (Based on First Month Data Ending Mid-August, 2023/24:  CPI-based Inflation remained at 7.52% on a year-over-year basis, which is normal in the context of Nepal. I have been saying that the range of 6% to 7% is very sticky but as a developing country, we should get 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 1.6 percent and 8.7 percent respectively. The CD ratio stands at 82.29 and the interbank interest rate stands at 2.57%.
   
   The remittances increased by 25.8 percent in NPR terms and 21.5 percent in USD terms, which keeps making a record of the most amount of remittance deposited into the Nepalese banking system. The gross foreign exchange reserves stood at NPR 1573.12 billion and 11.85 billion in USD terms. Deposits at BFIs decreased 2.3 percent and private sector credit decreased 0.1 percent. This decrement in customer deposits can be linked to our upcoming big festivals, Dashain and Tihar. We prefer cash over digital transactions during festivals. However, on a year-over-year basis, deposits increased by 11.9 percent and private-sector credit increased by 3.8 percent.
3. Investor Participation: In September, the investor participation was bleak. Despite trading in the range of 5.73% from its low to high, the volume for September was the lowest in three months. This makes me believe that people withdrew money from the market for our festivals with a minor upward move.
4. Regulatory Environment: Many new regulatory changes were seen in September. First of all, it’s an exciting month on NEPSE as SEBON unveiled ‘Amended IPO Regulations.’ My favorite clauses are:
   a. IPO Premium for High Capital Companies
   b. IPO Restriction
   c. Premium Price Calculation
   
   Then, SEBON brought in a policy to enforce stricter rules for Hydropower Companies. The purpose of this policy is to strengthen Corporate Governance and share sale protocols, especially regarding the lock-in periods of non-functional Hydropower Companies.
   
   Despite pressure from every place, our Governor Maha Prasad Adhikari refused to back down from his stance to keep the cap of NPR 12 Crore. On top of that, Nepal Rastra Bank released a circular that tightens the ability of people who wish to take loans for various purposes. If the individual shows signs of difficulty in paying back loans in one area, s/he will be ineligible to take loans for other purposes despite the level of your collateral.
5. Market Liquidity and Trading: The volume for September 2023 is Rs. 24.625 Billion while the volume for August 2023 was Rs. 38.307 Billion. In the month of September, we experienced the lowest volume in the last three months. 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 our big festivals end.
6. Market Risks: Many problems lie within the real sector of the Nepalese economy. With the lack of availability of credit adding higher interest rates on top of that, the real sector of Nepal suffers from a lack of business turnover. Even though the festive season is here, the businesses, both big and small, are unhappy. Many businesses that sell automobiles and mobile phones are scared to import more for the festival season as they fear there is no demand in the market from the public.
   
   On top of that, the fuel prices are increasing repeatedly. Even though the Nepalese government dropped the decision of Nepal Oil Corporation (NOC) to raise the prices of petroleum products, we should understand that this decision is temporary and the oil prices will move up as the festivals end. We should enjoy the price of petroleum products at this range while we can. Replace all of your LPG cylinders while you can in cheap.
   
   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. This creates a ripple effect and it also affects our market.
7. Market Outlook: Despite the above market risks, we can assume NEPSE will make a decision in October 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 September will lead the market henceforth.

Conclusions and Recommendations

In conclusion, we should wait and watch the market for the month of October to see if it breaks the high of September or the low of September on a closing basis. In my personal view, since we are lagging one month behind the market performance of previous years, October might not be a usual green month for us. Room for doubt is created especially by an expected lack of market participation during the major festival.

Happy Dashain To EVERYONE!

Assumptions and Limitations of the Analysis

1. Personal opinion in the “Market Sentiment Analysis” section about the interest of Big Money
2. Personal speculation in the “Market Risks” section about the oil prices.
3. Personal speculation in the “Market Risks” section about the lack of market participation during the festival season.