Contrarion Cometh
The consecutive decline in Nepse index from the height of 1059.86 as of 18 Dec 07 till now has already attracted the contrarian investors.
Month in Review (4-Feb-2008 to 5-Mar-2008 )
During the four-week period from February 4 to March 5, the Nepali stock market experienced considerable volatility. All major indices increased, except for Development Bank (down by 343.5 points), Insurance (down by 31.08 points) and Hotel (down by 5.28 points). The surge of market remained bullish for the first week of the month till February 12 after which the benchmark index, Nepse, witnessed gradual decline from month’s highest peak of 814.43 points to the support level of 751.81 points as on 27 Feb.
Though the market remained stagnant from 18 Feb to 27 Feb, sporadic bubbles appeared with the sense of optimism and inclining market index by 21.07 points on March 3 from the good news of political settlement between the government and Madeshi Groups. However, the beginning of March has been directed towards declining trend.
The accompanying table shows the market performance of the ten indices.
Technically, an under-priced market has been visualized, as 30 days simple moving average (SMA) price dominated the chart. Still 200 days SMA plunked Nepse index into under-priced zone. However, the latest crossover of 200 days SMA inheriting fairly trended market should not be underestimated.
Throughout the month, finance companies and manufacturing sectors recorded top growths of 82.12 percent and 31.79 percent respectively. All major indices recorded huge losses (averaging 25.22 points) for the last four months. However, hotel and finance companies have shown triumphant growth compared to others for the same four months.
The trading floor remained open for 22 days during the month in review. Total of 99 companies were traded amounting to Rs. 1991513161. Total 2446727 shares were traded from 14775 transactions. Market capitalization for the end of the month remained Rs. 245006.14
Average daily turnover for the month remained Rs. 90,523,325.50.
The commercial banks remained the dominant, accounting for 49.01 percent of the total amount transacted for the month. Manufacturing and Processing, Hydropower, Finance, Insurance and Trading sectors had 15.59 percent, 15.49 percent, 11 percent, 8.14 percent and 0.03 percent share respectively of total traded amount.
Market Outlook
While giving due consideration to the uncertainties present in the current environment, liquidity crunch has become the major topic of concern for the investment community these days. Though interest rate spread has been declining, the interest offered by commercial banks on deposits is still lower than the rate of inflation. Finance Minister Dr. Ram Saran Mahat has revised downwards the earlier target of 5 percent economic growth to 4.5 percent blaming it to the Tarai unrest, energy crisis and the rise in oil prices.
Thus, most investors are getting more bearish as the market declines. On the other hand, within the sphere of uncertainty, there are still spaces of optimism in trading environment.
The political settlement and heightened certainty of CA elections is likely to increase investors’ confidence and it may avert a further slowing in key economic indicator. Emergence of new players along with additional brokers is also expected to increase demand and supply in the market.
The consecutive decline in Nepse index from the height of 1059.86 as of 18 Dec 07 till now has already attracted the contrarian investors. Further, the general investors are psychologically expecting the bullish reversal pattern.
Many analysts foresee current environment translating into a continued period of volatility for the stock market. However, investors should remember that such periods of short-term turmoil naturally produce nervousness and that they should refrain from making major changes in otherwise well-designed investment portfolios.
Market Indices Performance |
Indices |
Open |
High |
Low |
Close |
Change |
Nepse |
752.3 |
814.43 |
708.73 |
758.7 |
6.4 |
Banking |
719.71 |
817.63 |
655.95 |
742.31 |
22.6 |
Sensitive |
191.85 |
178.65 |
209.58 |
196.32 |
4.47 |
Development Bank |
1436.87 |
1047.65 |
1436.87 |
1093.37 |
-343.5 |
Hydropower |
1118.68 |
1257.61 |
1118.18 |
1118.18 |
-0.5 |
Finance |
917.75 |
999.87 |
912.78 |
999.87 |
82.12 |
Insurance |
803.23 |
808.48 |
766.45 |
772.15 |
-31.08 |
Hotel |
413.56 |
415.49 |
408.28 |
408.28 |
-5.28 |
Mnfg. & Processing |
360.96 |
392.75 |
360.96 |
392.75 |
31.79 |
Trading |
162.32 |
164.98 |
162.32 |
164.98 |
2.66 |
Risk and Return Characteristics |
Sector |
MRR |
RRR |
Beta |
Interpretation |
Commercial Banks |
-0.02 |
-2.41 |
1.47 |
Highly volatile, overpriced, not attractive |
Finance Companies |
0.38 |
4.27 |
0.17 |
Over-priced, less volatile, less aggressive, attractive |
Manufacturing |
|
|
|
|
and Processing |
0.39 |
5.19 |
-0.03 |
Over-priced, less volatile, Less aggressive. attractive |
Development Banks |
-1.15 |
6.00 |
-1.15 |
Over-priced, relatively less volatile, less attractive |
Insurance |
-0.25 |
4.63 |
.08 |
Over-priced, less aggressive, less volatile, not attractive |
Hydropower |
0.67 |
0.21 |
1.03 |
Under-priced, more aggressive, relatively attractive. |
Top Gainers |
Quote |
Close |
% Chg |
Variance |
Beta |
%3Mth |
% 6Mth |
% YTD |
NFC |
1200 |
126.4 |
329.33 |
1.15 |
145.9 |
155.32 |
257.14 |
SFL |
877 |
123.2 |
10.82 |
0.13 |
199.32 |
230.94 |
213.21 |
AFC |
1300 |
63.11 |
6.32 |
0.61 |
136.36 |
150 |
160 |
BFL |
640 |
56.86 |
9.64 |
0.63 |
161.22 |
171.19 |
204.76 |
SDBL |
949 |
53.56 |
208.14 |
2.23 |
227.24 |
226.12 |
351.9 |
BBBLN |
428 |
30.89 |
5.96 |
-0.99 |
37.18 |
52.86 |
205.71 |
SBI |
1290 |
29 |
20.46 |
0.00 |
-43.91 |
-1.53 |
86.96 |
RMBFI |
239 |
22.56 |
12.20 |
-0.44 |
29.19 |
29.19 |
117.27 |
BOK |
1618 |
19.85 |
11.74 |
0.00 |
-26.29 |
15.16 |
78.78 |
Top Losers |
Quote |
Close |
% |
Variance |
Beta |
% |
% |
% |
|
|
Chg |
|
|
3Mth |
6Mth |
YTD |
LBL |
1000 |
-13.57 |
10.18 |
0.05 |
-26.74 |
52.67 |
83.49 |
DCBL |
659 |
-12.13 |
36.39 |
0.49 |
-72.54 |
-18.74 |
-14.42 |
BPCL |
1313 |
-11.28 |
5.39 |
-0.27 |
-23.22 |
-24.37 |
72.76 |
MDBL |
657 |
-9.5 |
10612.81 |
46.79 |
557 |
557 |
557 |
LICN |
929 |
-9.28 |
8.3281 |
0.20 |
-25.74 |
6.78 |
17.59 |
BDBL |
833 |
-8.96 |
135.3478 |
1.83 |
105.17 |
124.53 |
164.44 |
SBL |
815 |
-8.53 |
15.3952 |
0.03 |
-37.07 |
-0.61 |
36.74 |
NSM |
1500 |
-8.37 |
17.3204 |
1.32 |
279.75 |
383.87 |
368.75 |
NDB |
463 |
-8.32 |
11.0676 |
0.61 |
37.8 |
178.92 |
204.61 |
IMEFI |
997 |
-7.34 |
10.86 |
0.06 |
34.73 |
124.04 |
329.74 |
(Josheph Adhikari
Director, Product & Portfolio
Matrika Babu Pokhrel
Director, Research & Development
Jamb Technologies Pvt. Ltd.)
Think Before Your Margin Investment
In a small capital market like that of Nepal, the chances of malpractices by pooling, cornering, organized runs, ramping, matching and insider trading are very high. Such practices lead to artificial increase of the stock prices. According to reports in the newspapers, the main reason behind the recent bullish trend in the stock market was that a few market players created the artificial price rise by creating artificial shortage and by buying and selling the shares between themselves.
Another big reason behind the recent unnatural rise in the stock prices was the unsystematic margin lending by the banks and financial institutions. Some informal report had it that some of financial institutions and co-operatives had financed up to 90 percent as margin lending in Nepal. Such institutions had even given loan on the basis of broker’s trading bill. Almost all Nepali banking and financial institutions have not employed any expert to analyze the securities price and ongoing stock market situation. In this context, some of independent analysts and economists feared that big problems may erupt any time in the financial sector, which will ultimately disrupt the entire economic system in the country.
In Nepal, there were no strict rules, regulation and laws for the margin lending in the secondary market till recently. Because of that most of the banks, finance companies and co-operatives invested in the margin lending without complying the normal standards of loan management. Therefore, the NRB directed to discontinue margin lending for a certain period on 28th December 2007 to regulate this problem. After modifying some earlier directives, the NRB reopened margin lending on 22nd January 2008.
As per the new directives, while providing loan on share certificates the minimum requirements to be fulfilled are as follows:
• The loan can be given only by retaining the original share certificates.
• Such loan can be only 50 percent of the moving average of 180 days (earlier 90 days) or of the present market price whichever is less.
• The lending institutions cannot revise the value of the share certificates against which they have already lent.
• If the prior margin lending is more than 50 per cent of the 180 days moving average or current price, it should be brought within the prescribed level within the current fiscal year or when that loan falls due, whichever is earlier.
• Loan cannot be provided against the share certificates of those companies, which have failed to maintain capital adequacy ratio as per the NRB directives, have negative net worth, are de-listed from the Stock Exchange or have not submitted audited financial reports within a year of the end of the fiscal year.
• Banks and financial institutions cannot provide loan against share certificate above 25 percent of their primary capital. If a bank has already provided more than 25 percent of its primary capital as such loan, it cannot provide any additional such loans.
Margin lending as practiced in Nepal is far different when compared to the practice in other markets.
It’s no secret that the advent of credit did wonder to beef up our modern economy and the stock market has not been an exception. While most new investors buy stock through traditional cash accounts (i.e. using own money), there is another way which helps you to buy securities with loan. This is buying on margin. But while it can be a great way to get a little more return than your cash would normally net you, it also can lead to a quick dunk in some hot water. Margin accounts allow investors to buy more shares with a relatively small amount of cash by using the assets currently held in their accounts as collateral.
Margin purchases are usually made in the expectation that the stock market price will rise in the near future. It was introduced to attract more investors to the stock market. The use of margin purchase allows the investor to engage in financial leverage. Investor can increase the expected rate of return of the investment by using debt to fund part of the purchase price. Technically, in the developed countries the investor who wishes to buy on margin is required to open a margin account with a brokerage firm. In the USA, the inverter must invert a certain percent of the purchase price from his own fund known as the initial margin requirement. Regulations T, U, and G, prescribed in accordance with the Securities Exchange Act of 1934, give the Federal Reserve Board the responsibility for setting this percentage. The brokers are allowed to set it even higher. The daily calculation of the actual margin in an investor’s account is known as having the account ‘marked to the market’. If an account’s actual margin falls below the maintenance margin requirement, the account is said to be ‘under-margined’. In such a situation, the broker will issue a ‘margin call’, requesting the investor to either deposit cash or securities into the account, or pay off part of loan, or sell some securities currently held in the account and use the proceeds to pay off part of the loan.
In India, the brokers offer 50 percent initial margin to certain specified securities and generally maintain a 40 percent margin after you have bought a stock. In case the stock tumbles 10 percent, the buyer has to provide more collateral. However, when there’s a sharp downswing triggering a free fall, most brokers dump the client’s stock to cover positions, leaving investors with big losses.
Suppose an investor who wanted to buy 100 shares of Bank of Kathmandu that are trading for Rs. 2,000 per share. This investor requires Rs. 200,000 (i.e., Rs. 2,000 x 100) for this investment. However, 50 percent margin funding allows the investor to purchase these stocks for Rs. 100,000 with the rest Rs. 100,000 coming as a loan at an interest rate of 12 percent per year. When the stock's price increases by 30 percent and the investor sells this stock, his return works out to be 59 percent as he makes a profit of Rs. 59,000 (i.e. Rs. 260,000 - Rs. 201,000). Suppose that this investor with his own money buys these shares. In that case if he sells the same shares when the price rises 30 percent, his returns will be 30 percent only as he makes a profit of Rs. 60,000 (i.e., Rs. 260,000 - Rs. 200,000).
However, consider the same example when share price drops by 30 percent. If the shares are purchased with loan, the investor loses Rs. 61,000 (i.e., Rs. 140,000 - Rs. 201,000), thus wiping out 61 percent of his wealth. In the case of inverting his own cash, if the prices drop by 30 percent and the investor sells his stocks, he loses Rs. 60,000 (i.e., Rs. 140, 000 - Rs. 20,000), wiping out only 30 percent of his investment.
This analysis clearly shows that when the scrip hits up investor makes higher profit by investing with margin lending than by investing his own money. However, on the flip side, when the stock price tumbles down the investor faces huge losses on margin lending than while investing his own money.
Normally, margin credit is provided in Nepal by banks, finance companies and co-operatives.
In India and the USA such margin credit is usually provided by the brokerage companies. The interest charged on loan advanced by a broker for margin purchase is usually calculated by adding a service charge to the broker's call money rate. The call money rate is the rate paid by the broker to the bank that loaned the broker the cash, which ultimately went to the investor to pay for one part of the purchase of securities. Such loan is secured by the collateral of the share certificate itself for which the investor has paid 50 percent.
The complexities of such margin funding require the lender to keep a tab on the investor. Besides, the investors have to maintain a daily watch on the capital market for any adverse movement. The investor also has to keep a strict investing discipline and maintain 'stop losses' so that there will be no huge collateral damage on his wealth. One important point that should be kept in mind while using margin funding is that this should be used for short-term investment only. Investing for the long term through credit requires higher percentage of returns to break-even as the interest cost increases substantially in the long-term investment.
Margin Call |
The Up-swing |
Margin Investment |
Direct Investment |
Initial Investment |
200,000 |
200,000 |
Margin Funds |
100,000 |
Nil |
Investor’s Investment |
100,000 |
200,000 |
Interest on Margin* |
1000 |
Nil |
Investors Total Cost (A) |
101,000 |
200,000 |
Investment Value |
260,000 |
260,000 |
(Increase of 30%) |
|
|
Net Profit (B) |
59,000 |
60,000 |
Investors Returns (A/B) |
59% |
30% |
The Down-fall |
Margin Investment |
Direct Investment |
Initial Investment |
200,000 |
200,000 |
Margin Funds |
100,000 |
Nil |
Investor’s Investment |
100,000 |
200,000 |
Interest on Margin* |
1000 |
Nil |
Investors Total Cost (A) |
101,000 |
200,000 |
Investment Value |
140,000 |
140,000 |
(Decrease of 30%) |
|
|
Net Profit (B) |
-61,000 |
-60,000 |
Investors Returns (A/B) |
-61% |
-30% |
*@12 per cent per annum for a month Figures in Rs.
(Bhandari has recently completed his Phd in financial management)
