People associate the secondary market with bulls and bears. They get elated when they witness the bull charge upward, appreciating the book value of their portfolios. They get distressed when they see the bear charge downward, depreciating the worth of their stock holdings. For the majority, the market is only about the bulls and the bears every green on the screen indicates the bullish moment while every red indicates the bearish moment.

But the market is not only about these two trends. The third important trend is called a non-trending or sideways market. Such a market moves horizontally, as if traveling within a rectangular box. This situation occurs when the forces of demand and supply come closer to balancing out each other. The buyers are less interested in buying above a certain price tag, creating resistance, while the sellers are unwilling to sell below a certain price tag, providing support. Neither the buyers nor the sellers are in control of the prices. The non-trending or sideways market has no clear direction. This phenomenon occurs after a prolonged bull or bear run ends or pauses. Such a market continues for some time, providing opportunity to both the buyers and the sellers to consolidate their investment or trading positions.

The sideways market ends with breakouts, either above or below the ranged market, providing a direction. The direction could either be a continuation of the previous trend or a reversal. Since September 22, NEPSE has broken its downtrend trend and entered into a non-trending zone. 

The last eight weeks saw the bourse move between a high of 1157.80 and a low of 1121.10 in intra-day trades. The gap of 36.7 points might have motivated a few swashbuckling traders to exploit the situation by venturing to profit as the index moves between the highs and lows within the box. But this gap narrowed since September 30, with a new high of 1152 and a new low of 1127. The new gap is a measly 25 points.

The trend might be unfavourable for day-traders. The risk to return ratio for quick trading is high. But for the investors both individuals and institutions it would be one of the many cautious entry points. The general feeling in the market is that this could be a time for accumulation. Still, the index does not reflect any aggressive buying stance.

Smart money would already have entered the market through a systematic accumulation process. It will be buying at each strong support zone and waiting for further bargain or clear indications of an upswing. With the majority of companies declaring and distributing the return from the previous fiscal year of 2075/76, the market has entered into the traditional off-season period. Dismal reports of many blue-chip companies for the first quarter have further triggered a decline on the demand side. 

This signalled a continuation of the bearish trend, at least until the second quarter reports do not present good results. But if the current sideways market continues for another month or two, the demand could outweigh the supply and we could witness the start of the reversal process.

Talk in the equity market has always been full of strange jargon and abbreviations. A normal person has quite a struggle to make sense of this weird language or rather an alien sound for him/her. Whether we talk or read of the fundamental, technical or environmental analysis, we end up coming across such words, phrases and abbreviations again and again. Here I try to make sense of a few such words.

Every time we read through the financial reports of a company, we come across ‘Earnings Per Share’ (EPS). This EPS is, of course, not about the permit system for an employment in Korea. It is rather about how much money each individual unit of the share has made for the owner. The shareholder invests in the shares of a company with a hope of a good future return. EPS provides them with an understanding of how much return they can expect from each unit of share after the company deducts all the associated costs. 

EPS is calculated by dividing a company’s distributable or net profit by the number of outstanding shares (total number of shares owned by the promoters and the public combined). EPS informs us whether the company is profitable or not. Therefore, a share with a higher EPS is seen as more profitable. But higher EPS alone does not guarantee a good dividend. In most situations, a company will have to set aside a portion of net profit into different reserve funds and only a fraction of the net profit can be distributed as dividend. 

‘Price-to-Earnings Ratio’ (P/E Ratio) examines the current market rate of the scrip in comparison to its EPS. It helps people assess if the prevailing market rate of a scrip is ‘expensive or cheap’ in relation to the earnings it makes. P/E ratio shows how many times of the earnings the people are willing to pay for the scrip. This ratio is derived by dividing the current market rate of the scrip by the EPS. During bullish markets, P/E ratio of almost all the scrips—even the fundamentally weaker ones—report high P/E ratio. Investors have very positive outlook of the market during the bullish run. 

They do not think twice about doling out more money for the scrip having relatively less EPS. The rationale is the greed and expectations of never-ending price increment. This immediately reflects in high P/E ratio. During the bearish markets, people are unwilling to pay even the ‘fair price’ for the scrip and the P/E ratio starts to decrease. This is when smart investors start to accumulate the shares of fundamentally stronger companies.  

P/E ratio is primarily used to compare the relative market price of different scrips within the same industry. It is also used to compare the prevailing market rate of the scrip with the historical record to determine if it is the right time to buy or sell. The table above compares EPS and P/E ratio of a few scrips of commercial banks from the same segment to determine which has the higher EPS but lower P/E ratio.

(More to come in future issues)

Managing your money 
Lower-low territory

The previous multi-year bullish drive lasted four and half years (between March 2012 and July 2016). The biggest upswing was from a low of 1,022 points in November 2015 to a high of 1,888 points in July 2016. From November 2015, it ran like a non-stop one-way train without experiencing multi-week corrections. The generation that entered the secondary market at the start of 2012 had not witnessed the bitterness of bearish market in their life. The continued north-bound train with just a couple of serious cor­rections made people feel that the secondary market is the only place where the price (of the stock) will keep increasing and one can hardly lose money. With time, prudent investment practices turned into euphoric charges. Greed took over and risk started to increase. No one wanted to miss a chance to get on the bandwagon. Gordon Gekko became the god and everyone started chant­ing “greed is good”!

The sellers pulled the plug on 31 July 2016. Supply started to exceed the demand and the next three weeks saw continued retracement till the index reached 1,722, losing 166 points in the process. People could not believe that it was the start of the bearish trend.

The majority sincerely hoped this to be a normal long-overdue cor­rection and treated the situation as another opportunity to enter the market. The demand pushed back and managed to counter the situation, till the index was back up at 1,820 points, in two weeks. The upswing met resistance at 1,820-ish and the bulls were pushed back. The next wave of retrace­ment again lasted till 1,725, reach­ing the previous low, and find­ing the support at the same zone of 1720-ish.

Prudent investors and traders were cautious by now. They stopped active buying and instead entered a systematic selling mode. The zone of support at 1720-ish pushed the mar­ket back into northern territory. As it neared 1820-ish, the market again met stiff resistance and demand started faltering.

This was a clear sign of double top forming for the ones who have some understanding of technical analysis. Massive selling ensued from the first week of October 2016. Within next four and half months (mid February 2017), the market shed 520 points reaching the bottom of 1250-ish.

Between February 2017 and mid-October 2019, there had been three upswings followed by con­tinued bearish movements. The highs of each of these swings were lower than the previous highs of the upswing (called lower-highs indi­cating continued downward move­ment), while the bottoms of each of two downward reversals made lower-lows (i.e. new bottom of the current downward movement is lower than the bottom of previous downward movement).

In March 2019, the market hit an all-time low of 1,100. The support experienced at 1,100 pushed the market up till 1,330-ish by mid-May, gaining 230 points in the process. Between mid-June and early August, it saw sideways movement giving hope that it could be the bottom of the multi-year bearish reversal. But the market experienced another southbound plunge from mid-Au­gust, again testing the support zone of 1,100-ish.

The hope at the moment is the market will go sideways, which will give some confidence to the inves­tors and create a sense of optimism for new money to enter the market. Current market rates of majority of stocks are at their bottoms reflected in lower PE (price to earnings) ratios. This could encourage people to hold on to their existing portfolios and to enter the systematic accumu­lation process slowly, drying up the excess supply.

From the dawn of the civilization, people have been obsessed with the means to ensure cent percent certainty for any future undertaking. Uncertainty means unforeseen disruptions in meticu­lous plans people have developed and followed. People’s fascination with astrology, tarot cards and crys­tal ball, all point to their obsession to reduce unpredictability. This holds true with respect to the equity market as well. Investors/traders would do anything and every­thing to see the future. With the passage of time, different scientific and logical alternates have evolved in place of mysticism. ‘Fundamental analysis’ assesses the financial health of a company itself. It is all about looking inside the company’s financial reports to find answers. It evaluates the trend of revenue generation: is there con­stant revenue growth every quar­ter or erratic growth pattern over the quarters, or is there a negative growth? There might be a growth in absolute numbers which will make a normal person happy. But while comparing quarter-to-quarter growth rate with the same absolute numbers, the analyst might see that the growth is decreasing.

Now, the conclusion derived and the decisions made will be totally different for the normal person and the person analyzing the quarterly reports. Revenue analysis alone might depict healthy picture but if the cost of operation is huge, it will make a big dent in net profit. Nepali commercial banks have been issuing long-term debentures at an average rate of 10 percent annual return. This is reflected in their cost of capital over a long timeframe. A few of them have increased the volume of nonperforming assets too.

This calls for more provisioning requirement and will be a disen­chantment for calculated risk-tak­ers. In summary, fundamental analysis is all about understanding how much return the company can give back to investors. This is about computing intrinsic or real value of the company’s stock. Once the investor measures the intrinsic value of the stock, s/he can weigh if it is undervalued or overvalued in com­parison to the current market price of the stock.

‘Environment analysis’ looks at the external factors affecting the industry and the company itself. These include the political situation, policy decisions, the country’s mac­ro-economic condition, changing social dynamics, and technological advances. Business and economic broadsheets, magazines as well as online media are heavily focused on reporting and analyzing these exter­nal environmental factors. Large number of Nepali investors keenly follow them and base their invest­ment decisions accordingly.

‘Technical analysis’ examines the past market rates and traded vol­ume of stock in order to predict its future price movement. It combines market psychology with quantita­tive techniques. Technical analysis is based on the assumption that the market has processed all rele­vant internal and external available information and these are already reflected in the pricing chart and statistical indicators. Stock traders mostly apply these tools to identify entry and exit points for their trad­ing set-ups.

Professional day-traders depend more on technical analysis tools and consider information from fun­damental analysis and environmen­tal factors as a noise which create prejudices and misguide their cal­culations. Using technical analysis in Nepali equity market has been a new phenomenon. People are still not fully aware that it is a process of calculating probabilities to predict the price action at specific points and not a crystal ball to provide them with full-proof answer for their future undertakings!

Back in 1970, Jim Morrison crooned, “The future’s uncertain, and the end is always near.” This continues to be the truth and the only truth. They say, there are only two certainties: change and death. Change might be planned but mostly we have seen it being forced upon. The unwanted and unplanned change brings chaos in our structured life. This columnist talked of the hedging mechanism against such sudden changes in the form of insurance coverage in the previous issue. Rather than waiting for a disaster to fall upon us, parting with a small premium works as a stitch in time.

There are two broad categories of insurance products available in Nepal. They include the general or non-life insurance and the life insurance policies. The personal risks associated with accident, health issues, fire, arson, riot, and terrorism are covered by non-life insurance products. Also, the risks arising from the natural calamities of flood, landslide, storm or earthquake are covered by non-life insurance. In a nutshell, non-life insurance covers people, property, or legal liabilities.

If you want to hedge against a particular non-life risk, you can opt to buy the insurance product by paying a one-time premium. The coverage will last for a maximum of one year. The premium paid on vehicle insurance or property insurance or accident insurance covers the risk for one year. If you want to continue the coverage beyond the first year, you will need to renew the product by paying the premium for the second year too. In the case of travel insurance, the premium covers the travel risk of a minimum one week.

The premium for travel insurance is calculated based on the timeframe of risk coverage. This (the premium) is again paid one-time before the travel. If some unwarranted thing happens during the insured period, the premium will look minuscule in comparison to the insurance pay-out. Instead, if everything goes smooth, the premium paid will be an expense for the insured party. In the case of general or non-life insurance, the premium paid is purely an expense to avert the unexpected drainage of savings.  

Traditionally, life insurance covers the risk of the policyholder’s death. The insurance company pays a nominated beneficiary—normally the next of kin—an agreed amount upon the death of the policyholder. In return, the insurance company charges premium. This premium could be paid as one lump sum, just as in non-life products, or divided into smaller portions paid at regular intervals.

Today, life insurance companies have diversified their products by merging the concept of traditional life insurance with the long-term saving concept of annuities and credit function of the banking and financial institutions. This provides the policyholder an option of either transferring the benefit to the nominated beneficiary or to receive the return himself/herself after certain time.

The major contrast with life insurance concerns forced saving. The premium paid for life insurance is returned to the policyholder along with some sort of interest top-up, normally called bonus. Life insurance not only hedges against the risk of untimely demise of the policyholder (or the nominated beneficiary) but also the provision of premium-plus return after the mutually agreed timeframe.    

 People put in long hours and long weeks, not just to make their ends meet but also to realize their dream of a golden future. When they overcome the issue of bread and butter, they look for ave­nues to save a portion of their hard-earned money. Some save for future invest­ment in the real estate, the sec­ondary market or even the pre­cious metal. Others save with plans to buy a luxury mansion or a new car or even a family vaca­tion in some exotic destination. Their wish-list grows longer as the saving amount starts to swell. Alas as they keep chasing their golden dreams, a family member suddenly takes ill and has to be hospitalized. A few days or a week in the hospital with multiple lab tests and expert consultations exhaust all their savings.

Though crestfallen, they are optimists and continue to dil­igently save a portion of their earnings. Again the savings start to accumulate and they start fly­ing on cloud nine. Unfortunately, the euphoria does not last. Their high hopes are tarnished by a fire in their shop or workshop. The damage is massive, both finan­cially and emotionally. They are heartbroken but, again, the show has to go on. They pour in what­ever they managed to save into their business.

In both the cases, the unfore­seen negative events make them part with their savings and their dreams. Now they start to question: Is there a way to pro­tect them from such adverse circumstances? Of course, not all negative events may be pre­ventable. The only thing that can be done is to reduce the financial losses or impact of the event through proper hedging mechanisms against such inci­dents. One such hedging instru­ment against personal losses is insurance cover.

Insurance is a legally bound understanding, known as insur­ance policy, between the person and an insurance company to provide financial protection or compensation against personal losses. We can always transfer our personal risks arising from instances like the ones mentioned above to the insurance company in return for a small premium. Though the premium value may vary depending on the coverage size, it is still tiny compared to the coverage amount one gets if things go ugly.

In Nepal, getting an insurance policy is a new phenomenon. People still feel coerced to buy such policies. This columnist remembers people telling him that the government itself is a part of scam to force them buy expen­sive insurance policies during the buying or renewal of their car or motorbike ownership. They are still oblivious of the fact that if their vehicle has an accident, the policy will not only help them get it repaired and get reimbursed for their hospital stay.

It will also pay for the repair of the vehicle which it had hit and/or for the treatment of the person injured by their vehicle. If the people mentioned the two examples above were covered by insurance, they might not have had to exhaust their hard-earned savings. Instead, they could have easily realized the visions they were chasing, even with their big personal trag

Mutual funds are investment alternatives available in the market that are issued by merchant banks and managed by professional investment experts. Just as the companies going public issue shares to raise capital, the mutual funds issue units to raise funds for investments. The mer­chant banks issue these mutual funds with par value or face value of Rs 10 per unit. Both individual investors and institutions can invest in mutual fund units. The mutual funds collect money from the invest­ing public, known as unitholders, and pool them together for larger and diversified investments. They create portfolios of stocks traded in NEPSE, government and corporate bonds/debentures, and term depos­its with the banks. One objective of mutual funds is to widely diversify their investments. Conceptually, this diversification of the portfolio will help minimize the risk to an investment. The port­folio managers diversify the funds by including different investment instruments like stocks, bonds, debentures, and bank deposits in the portfolio. Even within a partic­ular instrument like stocks, they do not put all the money in one particu­lar sector (e.g. commercial banks or non-life insurance) or in one scrip. They further diversify by investing in different stocks within one sector while maintaining multiple sectors within the portfolio.

Monthly portfolio report ( Jestha month) of NIBSF1 (NIBL Samrid­dhi Fund 1), issued and managed by NIBL Ace Capital Company, has shown that it had invested in scrips of 25 different commercial banks within the commercial bank sec­tor. Its portfolio has scrips from 10 different sectors including mutual fund units issued by other merchant banks, which shows the level of diversification to mitigate risk.

The benefit for unitholders include economies of scale arising from bulk buys and sells and lower market risk through diversified holdings. Also, if a person is not an active trader but a long term passive investor, s/he will not have enough time to watch the market on a daily basis and conduct scrip-wise research. But unitholders do not need to be concerned with such issues as mutual funds have a pool of professional staff watching the market keenly and undertaking different sorts of calculations and periodic research. The unitholders can also easily buy and sell mutual fund units in the secondary market and convert their possessions into liquid capital.

Mutual funds can provide two types of returns to the unithold­ers. The first one is annual divi­dend payout. This is possible if the mutual fund has made a good profit during the previous fiscal. NBF1 (Nabil Balance Fund 1) paid cash dividend to its unitholders for four years between 2014 and 2017. It paid cash dividend of 14 percent in 2014 and 2015, 30 percent in 2016, and 42 percent in 2017. When the mutual funds mature, the assets of the fund are sold and the realized return are distributed among the unitholders. If such realized return is higher than the Rs 10 par value, the unitholders receive additional return. NBF1, after operating for five years, matured in April 2018. Its assets were liquidated and its unitholders received Rs. 17.46 per unit (inclusive of tax). The unithold­ers got back not only their invest­ment of Rs 10 but also the before-tax profit margin of 74.6 percent.

As per the mutual fund regula­tions, the funds are guided to invest the larger portion of their portfolio in stocks. This exposes them to the risks associated with the stock mar­ket, and as such their risk-mitigating capacity is slightly compromised. This is reflected in the declining net asset value of the mutual funds— the underlying unit value of the mutual fund after all its liabilities are deducted from its assets at the pre­vailing market rate—as the NEPSE goes south.

Recent introduction of debentures issued by the commercial banks might prove to be an additional tool for the mutual funds to manage their risk exposure. If the funds are able to maintain a stable net asset value and provide a minimum return during the downtrend, small­holder investors will have better hopes of their hard-earned savings being properly managed. With the fiscal year closing this week, the unitholders need not wait too long to see which fund managers have been working smartly even during the pessimistic times in the market O

 Mr. Market moves in zigzag pat­terns, up and down on a reg­ular basis. Whenever it is on a drive up, many people who have already invested start to calculate the profit in book. They contemplate of what they can do with the unre­alized profit, if they decide to book it. But their temptation to realize the profit is checked by the greed of losing out on any further price appreciation. They browse through the business section of newspapers and online portals on regular basis to find a clue or two on what might happen next, and join discussion forums on social media for the same purpose.

 Unfortunately, they are not full-time traders. While tending to their primary professional obligations, they miss the price movements for a day or two. And then they suddenly notice a big drop in price. They panic and sell their holdings imme­diately. Before giving the sell order, they nonetheless check online news portals and social media groups for any clue on the price decline. The online portals are abuzz with news of short-term traders actively booking their profits. But the social media is also filled with conspiracy theories on how big investors are manipulating the market to bring down the price so that they can buy cheap.

This gives a ray of hope of price stabilizing and moving up again. They decide to stay put and watch the price movement for next few days, which sees further bloodbath on the trading floor. The price con­tinues to decline. Every hope of price stability vanishes in thin air and their losses start to mount. Now, they can wait no more. They push the button to stop any more losses.

The price movement continues going south; they breathe a sigh of relief. They no longer have any stake in the market and stop watching the market movements. After a month or two, they just happen to check the business page of a daily. Price of the scrip which they sold for a loss catches their eye. The same scrip is again being traded above the rate at which they sold!

Quickly, they check the price movement of the scrip since they sold it. To their dismay, the price did not go much further down. It moved sideways for a few weeks and has again been moving north. Now, they are in a dilemma: do they have enough appetite for risk to reenter the floor or is it too much for them? Some decide to again take the risk, and history unfortunately repeats itself all over again.

Secondary market has pretty lucrative potential returns but the associated risk is also high. Realizing this, rest of them decide to look for alternative methods to benefit from the ups and downs of the market. The answer comes in the form of a Mutual Fund.

Mutual fund is a financial tool consisting of money collected from multiple investors, primar­ily targeted at smallholder inves­tors who have limited funds and no time to check the market move­ments on a regular basis. These funds are managed by professional money managers who invest pru­dently on stocks, government bonds, debentures, term deposits and so forth as approved by the regulatory body.

They assess the risk associated with each instrument, allocate the fund’s resources to diversify the risk and try to generate capital gains or income for unit holders of mutual fund. The primary objective of a mutual fund is to maximize the return on investment for unit hold­ers who have trusted and invested in them.