The Other Side of the Bullish Market
Dr. Ramesh Kumar Bhandari
The Nepali stock market is going bullish. Though there are bearish symptoms in the recent days, this may be a short-term phenomenon of cyclical nature (for example the festival effect may be at play as the Dashain festival is round the corner). The stocks of the banks and financial institutions are valued very high as reflected in their high price-to-earning ratios. The investors are paying excessively for an expected growth in earnings of these companies. And experts are of the opinion that the optimism shown by the investors is too early. Their advice to the investors is to always look at the price they are paying for the anticipated earning. A correction is needed, if not of the price than of time. If the present bearish signs indicate the correction period, it may continue for one or two months. Also the forthcoming budget will make big impact on the stock market trend.
Why bullish?
The first possible reason for the recent bullish trend is that when the prices jump up all the stakeholders are getting benefits. For example, the speculator are getting higher margin. Also the brokers, the security board, the stock exchange and the government are earning more commission, service charges and taxes with the increased share prices. However, nobody knows for sure as to how long the prices will remain bullish and how to maintain the market indices to their normal position. If the prices of securities go bearish, the only losers are the innocent investors who follow the rumors in the market. How to control such type of the capital market errors? Is there any system, which can control such kind of flaws without making present market system more restrictive through new laws or amendment the existing ones?
Another reason is that many financial institutions are offering right share and stock dividend these days. They are facing strong pressure to increase their paid up capital by the regulation of Nepal Rastra Bank. The shares of companies that have high earning and low liquidity have high market price while the shares of other companies that have low earning and paying low dividend have low market price. That means the price is high not because of the right share, but due to the other business environmental factors. Right share and stock dividend do not necessarily increase the return. Rather, when such shares are issued the case is just like stock split. Issuing such shares by the companies will not make big difference to the general investor. The investors need high return and their ultimate goal is cash dividend, which is possible only when the company earns more and gives the cash dividend. In the long-run, investor will benefit by capital appreciation if the company will perform better. Some of the companies are making big propaganda of their expansion plans and the like. But such types of half truth may not necessarily yield much dividend to the general investor in the short run.
Need for Short Selling
There is a way to control the unnatural price rise if short selling system is formalized. There would be a group of investors in the market who believe that the currently very high price may fall in the near future, and they would like to invest in this possibility by short selling. Short selling is a system that is very popular in the developed capital markets. Under this system, an investor borrows shares from another investor with a promise to return it in a specified future date. The borrower sells these shares in the market at the currently high price with the hope that the price of these shares will fall by the specified future date. If price actually falls as expected, he buys them and returns them to the one from whom he borrowed them. In this process, he makes profit. If the prices rise, he has to buy them in the higher price and return them. In this case he incurs a loss.
Thus short selling requires a little more cleverness than in the buy-and-hold position. Usually, most of the investors hope to do just that by buying securities in low prices and selling them in high prices later, i.e. they all follow the principle of buy low, sell high. Therefore, short-selling is not much different than the regular dealings. The need is to just recognize such dealing formally.
If such practice of formal short-selling is started in Nepal, it will certainly broaden investment opportunities to the investors. And at the same time, the broker will get more business and government will get more revenue due to the two way transaction. Furthermore, this will bring about correction in the market automatically after slight unusual change in the prices. The stock market prices will automatically come very near to the book value.
Many investors at present are much perplexed by the swift change in the trend in the market. While the stock market is pausing for a breather right now, the investors must take a focused approach. It is better to look for stocks that have corrected by at least 15-20 per cent and where the earnings potential has improved significantly. As the valuations come down, investors can get a good opportunity to buy. Some of the small financial institutions are performing well and have genuine potential. Look for stocks with better performance record and for smaller companies where the potential is higher. Besides, don't rush in to this stock market. If you are comfortable with the volatility, take your chances, but keep an eye on the valuations. Go for companies where there is a significant valuation discount compared to peers.
However, for the short-term investors this strategy may not be appropriate. However, if they will tread cautiously, they can do fine. It is recommended that short term investor should pull out some profits when the opportunity comes. You should hold on if you are a long-term investor. Also avoid the stocks where, the valuation is too high and when on the peer comparison, it appears unreasonable. These stocks may perform in the shortrun, which may make the investors feel that they missed a genuine opportunity. However, whenever there's speculative excess, it's the general investors who usually enter at a late stage and bear the penalty. So, watch your next steps.
Dr. Ramesh Kumar Bhandari has recently completed his PhD in Financial Management for his research on the Banks, Insurance, FinanceCompanies and Capital Market of Nepal.
Turning on a Dime
Monthly Review (19 Aug to 18Sept, 2008)
In a world where the market and the fortunes of even great companies are turning on a dime, Nepali share market is treading over a narrow path. Market got overheated by NTC’s shares and started to oscillate on its tune. The benchmark index zoomed up hastily for couple of days after NTC’s enlistment and later shed down as the telecom giant’s share started losing the ground. The huge market capitalization of NTC’s shares exerted immense pressure on the market; hence a new circuit breaker policy was introduced by replacing the previous point based system with the percentage system. Within thirty days NEPSE lost 53.25 points or 5.035% to close at 1004.28 from 1057.53. Most of the “A” grade companies plunged down that led the sensitive index to slip off by 20.74 points to end at 261.27.
As the secondary market failed to depict the real market scenario after the enlistment of the NTC shares, float index and sensitive float index were pioneered. Amid the budgetary chaos and heavy supply pressure, the ‘other’ sub-index skyrocketed by 259.68 points to close at 1027.94 from 768.26. Likewise, finance, hotel, manufacturing and trading screwed up by 28.43, 2.59, 13.07 and 7.46 points respectively. But the banking sector rolled down by 89.38 points followed by the downturn of 49.6, 51.97 and 26.84 points in development bank, hydropower and insurance groups. The float index and sensitive float index also presented a feeble start.
Monthly Market Trend |
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Sectorwise Distribution (Based on Total Amount of Trades) |
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An impulsive market trend was sketched for the month with gloomy days outshining the bright ones. NEPSE reached the highest point of 1175.38 in 31 st August and lowest point of 976.01 in 16 th September.
In the review period, 3141813 shares of 112 companies changed hands posting a turnover of Rs. 3211531253 and market capitalization of Rs. 524,575.02 million.
The market price was dominant over the 200 day’s Simple Moving Average (SMA) price, which indicated that the investors have overbought the stocks. For accumulating abundant profit, investors shifted their investment in overweighed stocks and some new avenues.
The accompanying figure shows sector wise distribution based on total amount of trades. The commercial bank accounted for 62% of the total amount transacted this month whereas finance, development bank, hydroelectricity, and insurance groups had 18%, 9%, 8%, 2% and 1% share respectively.
Market Outlook
The New Budget of New Nepal unveiled on 19 th September 2008 generated mixed reactions. The skepticism towards the new policies in regard to the financial market found its way. The prevailing Capital Gain Tax on listed securities transactions has been amended from 10% to 15% individuals making it equal to that for institutional investor; thus eroding the enthusiasm of the investors towards the equity market. A new regulation for right share issuance is likely to be imposed, according to which the listed companies can issue right shares only once in a year. This too may melt down the confidence of the investors. However, hydroelectricity sector is expected to take a great leap due to after the VAT oliday announced in its favor. Long lingering concerns about NTC shares turmoil has come to an end after the announcement of further divestment plan. This decision may possibly drag down the price of the Telecom’s shares. Most of the financial institutions have PE ratio more than 50 and all of these have revealed attractive profits. High expectation towards the financial industry has led to herd behaviour creating market bubble which might not last for long.Meanwhile, the market may perhaps go in a correction zone.
By Pratistha Bhurtel and Matrika Babu Pokhrel
(Bhurtel and Pokhrel are associated with Jamb Technologies Pvt. Ltd.)
Currency & Money
Global Economy
The economic data in recent weeks have been exceptionally bad, and no matter where one looks, the risk of recession appears to be rising. A few arbitrary examples include record low consumer and business confidence, falling housing market activity, weakening retail sales and production and rising inventories. The slowdown is being led by the G3 ( USA, Japan and Euro Zone), though countries such as UK, Australia and New Zealand also look rather vulnerable. The driving forces of the slowdown should be pretty well known by now: tighter credit, rising energy and food prices, and shrinking wealth due to tumbling equity and house prices. Moreover, there is no reason to expect a turnaround anytime soon. Instead, one should anticipate a significant lowering of expectations for economic growth in the coming months. Emerging Markets too appear to be hitting the brakes, with the noticeable exception of China. Overall, global slowdown is still very much alive and kicking. This also means that markets will probably shift their focus from inflation back to growth.
July saw further significant underperformance by the finance sector, and the bank sector seems to throw up new problems almost daily. In a nutshell, the driving force here is a shift in the liquidity and housing market cycles that would appear to continue for some time yet. Concern for financial crisis therefore looks likely to be relevant in second half of 2008 as well.
Fed is expected to stay on hold (i.e. 2%) well into 2009. In his semi-annual testimony to Congress in mid-July, Fed chairman Ben Bernanke stepped up the emphasis on growth concerns in the light of the financial crisis. However, the market is still pricing on a 30% chance of an interest rate hike in September as several FOMC members have since been putting out a very different message, arguing strongly that mounting inflation risks warrant the tightening of monetary policy sooner rather than later.
The US economy shed 51K jobs in July, the seventh straight month of job losses. The number was better than forecast and gave the Dollar a boost in the minutes following the release. The unemployment rate increased to 5.7% from 5.5%, surprising forecasts on the upside. The US manufacturing activity posted a reading of 50 in July, indicating that the activity level was flat. Most of the positive contribution came from the employment sub-index as new orders and deliveries fell. The prices paid component cooled somewhat as well. Construction spending fell 0.4% for June, and is down 5.9% on the year.
ECB hiked its interest rate by 25bp from 4% to 4.25% at its July meeting to tackle fears of second-round effects on inflation. The ECB now expects that inflation will not moderate towards the central bank’s target rate of 2% until 2009. Manufacturing activity in both the Euro-zone and the UK contracted in July as both economies succumb to the US-led global slowdown. Retail sales in Germany fell 1.4% in June, more than double what economists expected. On the year sales were down 3.9%. The report highlights how weak consumer confidence and high inflation are choking spending and Euro-zone growth numbers are set to be much weaker in the 2nd quarter compared to the 1st. The UK figure was the lowest since December 1998.
In Australia the manufacturing PMI posted 46.9 for July, the second straight month contraction in manufacturing activities that activity contracted. The slower domestic economy, higher interest rates and softness in housing construction all weighed on activity. These factors are being compounded by weaker global growth, rising costs and the high Australian dollar. Inflation at least seemed to cool in July, with the annual rate of inflation, falling to 4.6%.
EURO – USD
EUR/USD breached 1.60 target as ECB hiked its interest rate by 25 bps but then fell down below 1.5550 after oil prices fell down 15% and secondly, economic data out of Euroland came out alarmingly weak.
GBP – USD
The pound rose above 2.01 against weakening dollar but fell down below $1.98 as an index of British manufacturing dropped in July to the weakest since December 1998.
USD – JPY
Japanese Yen after gaining as much as 103.50 against dollar fell close to 108.00 as US dollar continued to gain against most of the major currencies.
AUD – USD
The Aussie-US Dollar pair after reaching near 0.99 continued to tumble as traders increase speculation that the Reserve Bank of Australia will move to cut rates sooner rather than later. Policy members do not want what began as a moderation in growth to turn into a serious slowdown.
INR - USD
The Indian Rupee after falling as low as 43.21 in the month of June rose to 41.82 per dollar in July, its strongest since May 12. However, rebound in oil prices from 12 week low renewed concerns of a widening trade deficit and as refiners stepped up purchases to meet their month-end commitments, USD/INR closed above 42.50 at the end of the month.
Dealers said the central bank’s move to end a two-month-old scheme of providing foreign exchange directly to oil refiners in exchange for special government-issued bonds was weighing on the rupee, as refiners are the biggest buyers of dollars in the local market. As well, some analysts said the central bank’s move to increase its key interest rate by 50 basis points to 9 percent may not give the rupee the boost many had expected.
In May, the trade deficit hit a record $10.77 billion as oil costs rose. For the first two months of the 2008/09 fiscal year, the deficit stood at $20.64 billion, sharply higher than $13.92 billion in the same period of last year.
Gold & Commodities:
Commodities were under broad pressure in July. Oil prices in particular saw ups and downs. It hit record high above $147 p.b. and then fell to $125 p.b, its lowest in 12 weeks.
Oil is the commodity benchmark - and sentiment has shifted. The players in the oil market have suddenly realised that the global economy is starting to react to elevated oil prices. Not only has the economic slow-down deepened in the US, it has also spread across the Atlantic to Euroland. The US is still the world’s largest consumer of oil, but US petrol consumption is now 3% down on a year ago and the number of kilometres driven has fallen 3.7% y/y. Airlines have cancelled routes and grounded planes. However, the clearest illustration of how expensive oil has affected behaviour is probably large pick-up and SUV sales - which are down a whopping 30% compared to six months ago. Americans are beginning to react to the hefty hikes in oil prices by buying smaller more fuel-efficient cars and travelling less.
Gold also rose above $980 an ounce, as rising crude oil prices and a weaker dollar boosted the appeal of the precious metal as a hedge against inflation. However, the fall in oil prices brought the gold price down close to $ 900 at the end of the month.
Call Money
Local inter-bank remained quite relaxed in the earlier weeks of the last month but liquidity crunch hit the market immediately after more than 9 billion rupees collected from IPO of Global Bank Limited was deposited in the central bank. 91 days T-Bill rate went up as high as 6.75% which pushed up I/B call rate close to 7.00%. Some banks were also seen utilizing SLF facility from the central bank.
Treasury Department Nabil Bank Ltd.
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