Accumulation Stage
Political events affected the Nepali bourse in May.
On the very first trading day of the month, the
then government decided to sack Nepal Army’s
Chief Rookmangud Katwal despite opposition from the partners in the governing coalition. On the second day, the Maoist Prime Minister Pushpa Kamal Dahal resigned. As an instant effect, Nepse index surged up though it proved to be just an early-cycle recovery play. Market remained truly volatile for the first two weeks of the month, failing to find a firm ground due to uncertainty about the new government. However, stocks grew green in the last two weeks of the month and a baby bull was spotted on the bourse after UML leader Madhav Kumar Nepal was selected as the new Prime Minister. Investors quickly lapped up the low priced scrips perking up the benchmark index by 65.85 points or 10.25% to end at a four months’ closing high of 707.89 from 642.04.
Deluge of buy orders overwhelmed the market. Renewed rejoice among the general investors helped to propel almost every sector up with development bank only in the down trend (down 7.30%). Though the indices of other than development bank group also hopped in and out of the red pool, reflecting a hazy sentiment, they all closed higher as May came to an end. The sectoral index that put up a stellar show over the month was Trading Group (O: 218.02 H: 281.78 L: 214.08 C: 281.78) up by 63.76 points or 29.24%. Also the Others Group (O: 605.08 H: 730.77 L: 605.08 C: 699.05) and Banking (O: 640.06 H: 768.92 L: 640.06 C: 722.72) registered lofty gains as the investors’ risk appetite grew and they flocked in to buy the shares of Nepal Telecom and commercial banks. Following the upsurge, Finance (O: 728.77 H: 771.63 L: 728.77 C: 760.80) and Hydropower (O: 843.63 H: 918.66 L: 809.86 C: 887.48) too notched moderate gains while Insurance and Hotel group went up 2.26% and 0.91% respectively. The revival in the core blue chips pushed the sensitive index (the barometer of the ‘A’ grade companies) to 187.48, a rise of 17.20 points or 10.10%. Meanwhile, the float index closed up 8.33% at 67.73.
All in all, 126 scrips were traded in the month with the gainers outnumbering the losers. Only 31 companies lost their share price while 67 gained it. The number of shares that changed hands was 2,324,361 via 22,393 transactions. And the turnover was Rs. 1,555,951,205.
There were initial public offerings of some financial institutions which drove out hefty bucks from the secondary market towards the primary market. IPOs of Sunrise Bank Ltd., Madhyamanchal Grameen Bikas Bank Ltd. and Prime Commercial Bank Ltd. were at the centre stage of the month. Moreover, there was also a flood of sort of right issue.
The 200 day’s Simple Moving Average (SMA) price is dominant over the market prices. This implies that the investors have oversold the stocks. It looks as if the political concerns in the country have dried up the sentiment, sending the investors into panic and forgetting the economic fundamentals. Although some green shots were evident in the later trades of the month, they are most likely the examples of ‘dead cat bounce’ rather than the indicators of a recovery in the real sense. The SMA supremacy shows that ongoing uncertainties in the country are causing gradual erosion in the investors’ confidence towards the stock market.
The figure on the previous page shows sector wise distribution based on total amount of trades. Commercial banks accounted for 60% of the total amount traded. It was followed by finance (19%) and development bank (15%). The share of hydroelectricity group was 7% while others and insurance group accounted for 3% each.
Market Outlook
Fundamentally, the market at the beginning of June was in the accumulation stage of investment life cycle - the stage in which the market has less volatility, few participants and less charm. This phase is fully dominated by astute investors who pick up those stocks which are undervalued. Astute investors buy the facts and sell the rumors thereby attracting new investors to drive the market into the overbought territory. The action initiated by the NRB on Nepal Development Bank has taught the investors to think thrice before investing on the scrips of financial institutions. The development also warns of how shaky the foundations of a financial institution may be if it is not backed by growth in the real sector.
In such situation, the investors should pick up the FIs stock with caution analyzing the management team, the Board of Directors and the gap between the company’s plan and the reality. The table on this page illustrates the fundamental health of major companies listed on the Nepse.
Technically speaking, the market is experiencing selling pressure in which most of the astute investors are collecting scrips that are at their lowest low. By analyzing the past trends of Relative Strength Index (RSI), market is found trading on neutral zone (see bottom chart on previous page). RSI experienced its lowest high at 73rd scale on May 18, 2009. Recently there was a reversal at level 85, which indicates that NEPSE got resistance on 740 making ‘M’ pattern utilizing the RSI at May 18 and May 27. Hence, technical analysis indicates that NEPSE should go down from this reversed trend and may get support at the point of 650.
(Bhurtel is the Relationship Officer & Pokhrel is the Head, Research and Development Department of Jamb Technologies)
