The crash of the Nepse Index in the last 3 years has awakened several questions regarding the risks associated with the investment in stocks. Nepse Index reached its all-time high of 1881.45 on July 27, 2016. After the peak, the market plunged more than 40% and closed at 1,102.64 Tuesday (March 05, 2019). There is mass panic among investors about which course of action should they follow. Should they sell their stocks at current levels and avoid further pain from the possible market drop? Or, should they hold on to their stocks with the hope of possible rebound?
I do not possess any expertise in predicting the next possible market trend. But I could study the past performance of the stock market and understand its behaviour. To know anout the current situation of the stock market, we need to understand how the market behaved in the past. There is a famous saying which goes as:
Those who do not remember the past are condemned to repeat it George Santayana
Following Santayana guideline, we dig into the past to understand the behavior of the stock market (which is NEPSE in case of Nepal).
History of NEPSE
Nepal Stock Exchange (NEPSE) opened its trading floor on 13 January 1994 (29 Poush, 2050). It is the only stock exchange of Nepal. Investors look upon the Nepse Index to see how their stock portfolio is faring. To understand the behavior of Nepse, we need to analyze the performance of the Nepse index over time. It has been 25 years since the start of trading of stocks in Nepse. However, due to unavailability of data of full period, 23 years from F.Y. 2053/54 to 2075/76 is taken as the period of study.
The Nepse Index in the past 23 years is shown in table 1. The Index is of Mid July of that fiscal year.
Table 1: Nepse Index( Mid-July)
As shown in Table 1, we can see that the stock market has passed through several ups and downs during this period. Nepse Index was at 176.3 on Mid-July 2053/54. The index after 22 years is at 1102.64(Falgun 21,2075). This is a gain of 525% over 22 years which is 8.69% compounded annually. The 8.69% return from stocks excludes the dividend return received by investors.
We can clearly see the fluctuation in Nepse Index in the chart 1:
Chart 1: Nepse Index (Mid July) over 23 years
Bull Phase in Nepal Stock Market (NEPSE)
During this period of 23 years, there have been three bullish periods:
Period 1: 2055/56 to 2056/57 (2 years)
Period 2: 2060/61 to 2064/65 (5 years)
Period 3: 2068/69 to 2072/73 (5 years)
In Period 1, the Nepse index increased from 163.3 to 360.7, a gain of 120.88% in a period of two years. In the Bull period 2 which lasted 5 years, Nepse rose from 204.86 to 963.36, a 370.25% increase in value. This is compounded annual return of 36.29% excluding the dividends. In the third period from 2068/69 to 2072/73, Nepse index increased from 362.85 to 1718.2.During this period Nepse gained in value by 373.52%. Investors made anuual compounded return of 36.48% excluding dividends. (Note: The actual peak and bottom values of Nepse Index are not taken, rather values at Mid July of that fiscal year where Nepse reached peak and bottom are taken)
Apart from huge returns during these 3 bull markets, one interesting trend that is seen is that Nepse Index surpassed the previous peak (of the previous bull period). This can be clearly seen in the chart 2 below:
Chart 2: Bull Phase in Nepal Stock Market (NEPSE)
Bear Phase in Nepal Stock Market (NEPSE)
Knowing about the bull market only may be dangerous for investors. Bull markets usually entice novice investors with lofty returns in a short period of time. This attracts huge amount of money in the capital market with the expectation of higher return. However, investors exhilarated with quick profit forget that the risks has also substantially increased in their investment. The investment made during later phases of bull market usually result in heavy losses due to impending crash. This is experienced by several investors lately in the Nepalese share market, who made investment when the market reached new peak every day.
Therefore, it is essential to understand the bear market and the losses it may bring with time. All the money earned during the bull market will be lost if the investors cannot detach himself from the excitement of the market. If an investors makes heavy profit during market and still invests at the peak of the bull market, then his profit will be washed away when the flood of bear market comes.
In case of Nepal, three major crash occurred during the period of 23 years in the stock market.
Period 1: 2057/58 to 2059/60 (3 years)
Period 2: 2065/66 to 2067/68 (3 years)
Period 3: 2073/74 to 2075/76 (3 years running)
In the period 1, the Nepse index declined from 360.7 to 204.86, a loss of value by 43.20% in a period of 3 years. The next major crash occurred from 2065/66 to 2067/68 where Nepse fell from 963.36 to 362.85. This is the fall in value of 62.33% in 3 years. Finally, the third crash is the one we are currently witnessing. The crash actually started from fiscal year 2072/73. Nepse fell from 1718.20 to 1102.64 as of Falgun 21,2075. This is the decline in Nepse value by 35.82%. The market is still on the bear mode. (Note: The actual peak and bottom values of Nepse Index are not taken, rather values at Mid July of that fiscal year where Nepse reached peak and bottom are taken).
The bear phase in Nepal stock market is more clearly visible in the chart 3 below:
Chart 3: Bear Phase in Nepal Stock Market (NEPSE)
The stock market of Nepal has been through several booms and bust in the past 23 years. Investors made and lost huge sums of money during this period. However, market is moving forward in the positive direction in the long run. Nepse index moved from 176.3 in 2053/54 and reached all time peak of 1881.45 and is currently at the level 1102.64. There are several investors who have been through all these fluctuations in Nepse. Experience has taught them that patience is the greatest virtue in the time of great difficultly. Market will always rise and fall in the coming days. This is the trend of the stock market. The greatest asset investors possess is their perception towards the market. If the market influences their behavior or decision, then stock market can be quite painful to be involved in.
I cannot forecast whether the stock market of Nepal will rise or fall in the coming days. However, I can suggest investors to be true to their decision and stay by their decision even if the investment community disagrees with you. If you analyzed a stock that is cheap enough to buy, then purchase it although there might be rumor that the market will decline further. If you think some of the stock you hold are overpriced then sell it even if the rumor might be that the market will rise higher. At last, I will leave you with the quote by legendary investor John Templeton.
Invest at the point of maximum pessimism: John Templeton