Background

The stock market just like everything else, runs on cycles. What goes up comes down and what goes down comes up. What goes up the most can come down the most and vice versa. After every bear comes a bull. After every bull (rising prices and index) comes a bear (falling prices and index). This essentially means that if stock price is rising since several years there may be chances it will start falling soon and vice versa. But it can be unpredictable and uncontrollable. This unpredictability increases by many folds when we face different problem like pandemic, natural disaster and some news on country economy.   

 

Before COVID 19, the NEPSE index had increased by 47% from 1109 (Nov 26, 2019) to 1632 (Feb 25, 2020).  This trend however did not remain for more than month. The NEPSE index fell by almost 29% because of COVID-19 when the market opened after the lockdown. But it is now back to its normal momentum as it was before the lock down. However, before taking any decision for investment, we need to examine the changes that occurred in the different sectors like Commercial Bank, Development Banks, Microfinance, Life Insurance, Non-life insurance, Hotels, Hydropower etc before and after the lockdown. If we analyze the sub sectors in NEPSE, Microfinance, Life Insurance and Non- Life Insurance sectors have largely reached the point where it was before the lockdown. However, Commercial Banks and Development Banks indexes have not gained much to reach the same level as it was before the lockdown.

 

Way Forward

Banks in Nepal, have already decreased the interest rates in their deposit products. Therefore stock market can be an attractive alternative for us to get good return. However, in the short term, it is expected that the price fluctuation will continue in the stock market as the short term investors (speculators) may follow the crowd rather than doing fundamental analysis. For common people like us, it is strongly recommended not to focus on the short term gains and stay away from the speculative (short term buy and sell) investment. If we have already invested in the stock market, this is not a time to sell our investments right now. We need to understand that historically, the stock market always rebounds eventually after the crisis. Hence, it is strongly recommended to take a mid to long term view in the investment. As a rule of thumb, we need to focus on finding companies which has a robust balance sheet, low leverage and good cash flow for the safest investment options. Therefore during the time of crisis and uncertainty, it is generally recommended to invest a large portion of our savings in the highly regulated industries like banks, insurance and microfinance sectors.

 

In addition, we also need to understand that everything will not go to the dogs at once. All sectors and all industries will not have a bad time simultaneously. If we invest our saving in different sectors, it will minimize the risk owing to the adverse situation. For example, if the price of one sector (for example Hotels) is failing, the price of other sector may be rising (For example Banks) and it may compensate for the loss. Hence, it is also advisable to allocate (invest) some of our savings into other sectors (like hydropower), fixed deposit and debentures, issued by the banks. Debentures are considered less risky than stocks, as it will provide a fixed, regular and stable source of income to its investors. Hotel industry can be one of the areas for the investments, however, this sector is probably the hardest hit due to the COVID 19. The tourists flow will be less in the coming months and probably few years. Hence, due to the minimal occupancy, the profitability of the hotel sectors will expected to be low in the coming year. In contrast, it is expected that the Hydropower sector may rebound soon as it produces the essential commodity i.e. electricity. Therefore, some portion of the savings can be invested in the hydropower sector.       

 

Finally, in investment, we may not be able to always buy low and sell high. But our objective is not to be right all the time but to make money when we are right. Therefore, the first step of any investment is to make the plan rather than blindly following someone else. It is especially more important during the time of uncertainty. Therefore, focus on mid to long term (five to ten years) investment plan with proper allocation of assets in different sectors.

Data sources: Nepal Stock Exchange (http://www.nepalstock.com/) and https://chart.nepsechart.com/