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 A company with a strong track-record of providing good dividend every year informed NEPSE of the bumper return for the previous fiscal year. The information was posted on the NEPSE website after the market closed for the day at 15:00 pm. The news spread like wildfire. People were ecstatic with expectations of good capital gain. Buyers jostled each other to place pre-order at 10:30 am the next day. When the clock struck 11:00, the floodgates opened. Buy orders over­whelmingly surpassed sell orders. The price shot up in a geometric ratio in no time. Buy orders con­tinued to outpace sell orders with buyers buying at the sellers’ rate.

Clock struck 1:00, and price inched closer to circuit breaker for the day (in NEPSE, circuit break applied for individual scrips is ten percent price movement on either side, positive or negative) as it reached nine plus percent gain. More people queued up (at the buyers’ end) not to lose out on an opportunity to make a quick margin. Suddenly, the price froze in time.

Though it stayed above nine percent gain for the day, its move towards the circuit break was disrupted by continuous trans­actions happening at the buyers’ rate. Trained eyes would notice in the NEPSE floorsheet the sellers appearing at intervals and fulfilling the buyers’ demand at the buyers’ rate itself.

Clock struck 2:00, and the move­ment on the sellers’ side heated up. More and more sellers queued up. The buyers began to bargain for more discount. The sellers gave in to buyers’ demand. Discounted rate further stimulated people to place additional buy orders. The sellers again were in advantage. This stabi­lized the scrip’s rate for a moment. But the growing sell orders further pushed for bargain and the market closed at 3:00 with the day’s gain almost wiped out.

People were left mystified. They counseled themselves trusting there would be fewer sellers the next day. Unfortunately, the same scenario unfolded with the script the next day as well. Growing volume at the selling side pushed the price further down south. The buyers from pre­vious days felt trapped and in com­plete frustration started blaming foul play and mouthing conspiracy theories.

A similar situation occurred with the Premier Insurance Company (PIC) when it declared a dividend of ’79.79% bonus share and 4.20% of cash’ on May 31, 2019 (Friday). The news became public during the weekend. People had time to assess the proposed return. On Sunday ( June 2), the PIC jumped up and opened at Rs 1,249. This was 5 per­cent increment from the previous closing of Rs 1,190 (May 30). The day saw continued buying interest with huge volume transacted. Through­out the day, the buying interest was equally matched by the growing volume of selling orders. The day closed at Rs 1,173 (Rs 17 less than the closing of the previous trading day on May 30) with selling side exhaust­ing the buying interest.

At the heart of this phenomenon was the availability and processing of the information. Traders/inves­tors who had done their homework properly knew that the PIC, being a non-life insurance company, has to raise its capital to Rs 1 billion as per the requirement set by the Insur­ance Board.

This gap in the capital need could be fulfilled either by issuing right or providing bonus. Its financial reports already revealed enough funds with the PIC from net profit and in reserves to provide bonus. The ones who had processed two pieces of information had already discounted effects of the news in the price movement.

They accumulated the scrip at different support zones and were waiting to cash in on the news. The market, starting from the Wall Street, calls this phenome­non “buy on the rumor and sell on the news.

 On May 29, the federal gov­ernment unveiled a budget of Rs 1.532 trillion for the fis­cal 2019-2020. It allocated Rs 957.1 billion (62.47 percent) for regular expenditure, and Rs 408.59 billion (26.67 percent) for capital expen­diture, while earmarking Rs 167.86 billion (10.96 percent) for financing of national debt. One might be disappointed that the federal budget sets aside a whop­ping two-third of the budget for recurrent expenditure of paying salaries and administrative costs while a meager one-fourth goes for development works. Analyz­ing the earmarked budget figures of last five fiscals starting from FY 2014-15 (see chart), one finds no deviation from the trend of average allocation of 61 percent for regu­lar expenditure and 25 percent for capital expenditure.

The proportion of allocation is not an issue but fund utilization capac­ity of the government mechanism is a concern. The government has been struggling to utilize above 75 percent of the earmarked budget for capital expenditure each fiscal. The unspent 25 percent development budget speaks of delayed develop­ment deliveries. This underutili­zation of the allocated budget and delays in actual spending have cre­ated a chronic dearth of liquidity in financial institutions for the past few years. After the bourse reached the all-time high of 1,888, the nation has been experiencing double digit return on term deposits along with continued shortage of loanable funds with the banking and financial institutions (BFIs).

There is some respite in the fourth quarter of the fiscal but continued crisis during the remaining three quarters. The inability to spend development budget during the first three quarters has continu­ously resulted in mismatch between idle liquidity in government coffers while BFIs struggle with cut-throat competition to attract term deposits by providing ever-increasing interest rates. The inherent risk is in com­mitting to longer term credit with such fly-by-night deposit collection. It also makes large investors choose term deposits instead of putting money in the secondary market.

Category “A” financial institutions come up with debenture issuance as a hedge to address their long-term credit need. An average return of 10.25 percent on these deben­tures is not helping bring down the cost of capital, and is making the credit expensive. In order to break this vicious circle, the fed­eral government needs to ensure both timely and higher utilization of the allocated budget for capital expenditure. Unless it strengthens its willingness backed by efficient and accountable procurement pro­cedure and does away with red tape, the average capital expenditure will remain pegged at 75 percent.

The federal budget has set a target of economic growth of 8.5 percent while keeping inflation below 6 per­cent. It aims to achieve its devel­opment goal through focused cap­ital expenditure on infrastructure, energy, education and health. Infra­structure and energy development provides conducive environment for other sectors to grow, and the focus on education and health is to cre­ate competitive and skilled human resources.

For sustained economic growth, a nation needs a good combination of hardware (infrastructure) and soft­ware (skill sets). The budget for the next fiscal is trying to address both these needs. Of course, the results will be determined by the quantity and quality of the implementation process.

The allocated Rs 163.52 billion for infrastructure is 40 percent of development budget for 2019-20. This is earmarked for expansion and upgradation of existing network of highways, connecting the East- West highway with various indus­trial corridors, continued work on Kathmandu-Nijgadh Expressway, blacktopping of Postal highway and Pushpalal Mid-hill highway, con­struction of north-south link road of Rashuwagadhi-Galchi-Thori high­way, conduction of pre-feasibilities and detailed project reports (DPRs) of new infrastructure projects, and so forth.

This increased investment on infrastructure is guided by the phi­losophy of regional connectivity to enhance trading opportunities, to provide agro products of Nepali hin­terlands access to multiple markets, to increase the inflow of tourists from two giant neighbors, as well as to work as a transit alternative for India and China.

Under energy, the government has allocated Rs. 83.49 billion, or 20 per­cent of development budget. It plans to develop two big hydropower or solar projects in each province. Con­tinuing with its strategy of public participation in the hydro sector, the federal government plans to jointly develop 19 additional hydropower projects with 3,500 MW installed capacity. This will provide the public additional investment opportunity. Also, entry of multiple large-scale hydropower scrips in the second­ary market will reduce the current dependency of the index on one particular banking sub-index.

The federal budget has earmarked Rs 163.76 billion for education, sci­ence and technology to increase lit­eracy, improve quality of education in community schools, and increase availability of technical education and vocational training. Programs for improvement of education in community schools, for which Rs 5 billion is separated, include improv­ing the infrastructure which should include a playground and a labora­tory, introducing better curriculum while making it more practical and technical, and arranging adequate teachers including a physical educa­tion teacher in each school.

The government has also allo­cated budget for construction of 300 schools, expansion of classrooms, and scholarships for needy students. It has earmarked Rs 1.50 billion for volunteer teachers to be imbed­ded in government and community schools as needed and Rs 1.92 billion to conduct skill-based training for 83,000 youths. This will upgrade the skill-base of Nepali workforce both in the domestic and international job markets.

 (With inputs from Simran Shrestha)

 Every year, the Ministry of Finance comes up with figures highlighting soaring consumption versus modest saving patterns of the general public. Though just a small pie is left for saving, people still find it challenging to think of saving alternatives apart from the traditional ones of real estate and precious metals, more so in peri-urban and rural contexts. The savings portion of inbound remittance is mostly being used in acquiring another piece of land or adding one more storey. The general belief is that an investment in real estate will provide multiplied returns. At the outset, this might look true. But if one starts to calculate compounding return over the period of real estate holding, the story might look totally different.

Smart ones always look for avenues to diversify their holdings. They try to make their money smarter by making it work more efficiently for them. Starting a business venture could be one of the options, but the inherent risks associated with such ventures are higher compared to putting one’s money into largely true and tested business models of others as a lender or as a passive partner.

Both the options have different scales of risk. The ones who are comfortable with lesser risk would go for the lending option and tools available include term deposits and debentures issued by the financial institutions or the government bonds.

The ones who have slightly higher appetite for risk would go for ownership stake in public business ventures

The ones who have slightly higher appetite for risk would go for ownership stake in public business ventures as a public shareholder. Motivating attributes for this option include ease of entry/exit and multiple sources of return on investment–cash dividend, bonus share or price appreciation of a scrip. If one is more interested in price appreciation, s/he needs to keep a closer tab on market situation for prudent decision-making.

Nepali bourse, ever since making the all-time high of 1,888.36 in July 2016, has been running continuously down. Multi-month downtrend had has pauses in between. In February 2017, after testing the low of 1,218.86, the buyers overcame the sellers till April 2017 and the bourse reached the seasonal high of 1,746.82. Again, the supply exceeded the demand and the market tested the low of 1,134.92 in March 2018 followed by a bounce-back to 1,461.21 in April 2018.

In 2019, the same pattern has continued. The index tested the low of 1,100 on multiple trading days in February. Since March, it showed a sustained growth till it neared 1,350-ish.

The index has been in stalemate for past four weeks (since the fourth week of April). It is moving sideways, unable to break the resistance of 1,350-ish while taking continuous support of 1,280-ish. Compared to past two and half years, market confidence is in positive zone which is reflected in market depth and trading volume each day. Still, the market direction will be guided by whichever way the index will break from the current sideways moment.

This trading week, which started on May 27, has seen lots of vol­atility around budget specu­lations. Downward movement of the index had paused at 1,291 and since then it had shown erratic movements guided by optimism (upswings) followed by pessimism (downswings). This cycle contin­ued even after the budget for fiscal year 2018/2019 was unveiled on May 29. Investors/traders are analyz­ing what changes can be expected in the market fundamentals after budget comes into effect on July 17. The budget came up with many positive features to directly impact the prevailing fundamentals. All in all, positive features outweighed negative ones.The budget finally ended confu­sions surrounding the provision of VAT levied on broker commission. The budget touched on capacity building of regulatory bodies and amending Nepal Rastra Bank Act, the Insurance Act and the Securities Act in line with the changing times. It also addressed the need for regu­latory mechanisms in the hydro and other sectors. In the BFI sector, it came up with an ambitious plan to encourage every citizen to open a bank account. It also increased the deposit insurance coverage of small­holder depositors, to Rs 300,000, in order to safeguard their hard-earned money and build confidence in for­mal channels. If this happens, we should see additional liquidity in the banking channels.

The budget has announced health insurance of Rs 100,000 for senior citizens over 70. It also expanded health insurance coverage for the general public in all 77 districts. Cur­rently, this provision is being imple­mented in 25 districts only. The budget plans to bear 75 percent of insurance premium on agriculture, livestock and fishery. Health insur­ance coverage of the civil servants will also be raised. All these provi­sions are positive for the insurance sector, both life and non-life. With one policy decision, the government has expanded the market size of the insurance sector. One will see the results in terms of growth in net profit and EPS in the coming years.

The budget has made it compul­sory for the companies with one billion or more of paid-up capital to go public. Moreover, it encourages companies that have Rs 500 million of paid-up capital to go public by providing them tax breaks. Like­wise, private equity, venture funds and hedge funds have been allowed into the equity market. It has plans to get Nepal sovereign credit rating to facilitate easier access to foreign investment and credit. This again will help industries as well as ease up the liquidity situation.

Raising the ceiling on capital gain tax for individuals is the negative aspect of the budget. Of course, one can always argue that the budget has raised the CGT simply by 2.5 percentage points, from 5 percent to 7.5 percent. But if one calculates the percent increment, it comes to 50 percent. This might encourage the traders to trade less often as they need more margin to ensure that they are still making money.

The positive provisions stated above are related mostly to cre­ation of newer supplies in the equity market. But the budget is silent on how the excess supply, already available due to capital increment of the BFIs and insurance sector, is going to get absorbed. Today’s reality is that people from only a handful of districts are linked to the Nepali equity market. So long as this situ­ation is not addressed, we will con­tinue to see the supply overshadow the demand.

Since July 27, 2016 (the day NEPSE notched the all-time high of 1,888.36), the index has been experiencing downward primary trend. Even after almost two years, the primary trend is still south-bound and there is no imme­diate sign of northern winds. But in this time, the investors/traders had a few good respites. Till March 27, 2018, Mr. Market presented us with at least four upward swings of secondary trend. Mr. Market consists of optimists and pessimists. Whenever optimists overwhelm the pessimists, the mar­ket turns green and a north-bound rally ensues. Looking back at the charts of July-October 2016, we can see that the first contingent of pes­simists booked profit at 1,888 zone and they were quickly followed by early adopters.

This resulted in making more sup­plies available in the market than the existing demand could absorb. There was a sharp pullback to 1,675 within a short span of one month. The all-time-high seen just a month back made the majority entertain a false hope of new highs and this optimism helped Mr. Market to make a first rally, starting from 1,675 itself and ending at 1,855. The pessimists saw an opportunity to book profit. The early adopters again joined the party and their combined efforts pushed the index down to 1,725.

At 1,725, the selling started to fal­ter and the common man became happy, thinking that the index was unable to go down even to previous level of 1,675, and that means the uptrend is still valid. The innocent laggards who missed the opportu­nity to get a bigger share of cake and the over-ambitious optimists felt it the right time to enter.

Again, the optimists pushed the pessimists up to 1,822. By then, the population of pessimists had qua­drupled. The selling frenzy which got triggered at 1,822 resulted in con­tinuous downswing of the index for more than four months. The minor rallies were quickly utilized as the profit booking option or a stop loss zone. The fear overcame the greed and the situation continues to pre­vail till date.

Three weeks back, this columnist had talked of the seasonal effect. The fundamental realities of liquidity crisis, increase in the deposit rates, three-fold growth in the supplies due to bonus and right shares, and decline in earnings per share, are totally ignored by the masses. The masses read the growth in net profits of the banking and financial institu­tions, the capital plan of the insur­ance companies and the soon-to-be-operated online transaction system, as the realities which could easily overcome the downward biases.

The hope fueled new optimism and a rally started at 1,135. As it con­tinued, the talk of the town turned to the index reaching 2,000 and beyond. As expected, the banking and financial institutions related sub-indices could not provide much help. The rally faced a strong resis­tance at 1,461. From the start of May, the index started moving sideways, and it will be too early to say when the index will break the sideways movement. People feel the negative fundamentals are equally matched by the positive fundamentals and we continue to see confused state of the index !  

The active seasonal investors in the market talk of the months of March, April and May as the plant­ing season. The rationale is that companies have already earned for half-a-year and published financial reports for the first two quarters, making it easier for the investors to assess and compare between the scrips. By mid-April, the third quar­ter reports start getting published, which further verifies the earning trend of the scrips.

The comparison between the earning per share (EPS) of different scrips along with price-to-earnings ratios (P/E ratio); the regulatory provisions guiding the companies to increase the capital base or reserves; and the past dividend history, all makes it easier for the investors who like to take calculated risk. As the seasonal investors/traders take their position, the general public starts to notice an increase in demand and price. As more buyers enter the market, the smaller green flickers change into large bullish flames.

The fourth quarter reports and AGM notices bring in the climax to the season. The salivating bull spreads contagious greed all around, making the majority euphoric with new-found ‘knowledge’ and ‘unre­alized’ gains. The seasonal inves­tors and calculated risk-takers feel the impending doom. They slowly change their stance from BUY/HOLD position to SELL. The supply grows and the early adopters move in, bringing more supply and chang­ing the signals from green to red. Historically, the harvest season is between August and September, to be followed by longer stretches of correction and bearish movement.

The market consists of ‘smart’ people. They do notice the patterns and make attempts to beat them. That is why historical patterns tend to change their normal course of movement at regular intervals. This was noticed in 2017 too. The sea­sonal entry in the month of March was followed by investors/traders who knew that the pending capital increment issue of the banking and financial sector and certainty of the elections would bring in the masses sooner than in the normal times.

The same expectations and reali­ties gave the stakeholders additional opportunity to make a quick bullish run in the July-August period too. Fast forward to 2018 and we are see­ing a similar buying interest since the start of April. This is further fueled by the fact that insurance companies have to complete the capital incre­ment process by mid-July. The bull run triggered by insurance sector and followed by micro finance can last till August-September only if the run is backed equally by the banking and financial sectors.