NEPSE Index guided more by intuitions rather than ability of the underlying to provide return
Well they said 1218(Index Nepse) seemed to be the end point of correction. Yes indeed. Liquidity crunch in the market had hit hard on the Nepal Stock Exchange. Under-mobilization of government budget in the first half of the Financial year and soaking up of Indian Currency from market being the major reasons for the liquidity crisis. Similarly, FPO issued by Banks and insurance companies had soaked cash from the market. The government had to pour the budget in the market sooner or later. Similarly, 3 months after the decision taken by Narendra Modi to withdraw 1000 & 500 Rs note from the market, the void left by banned IC started to fill up. Billions held by NLIC FPO was floated back into the market after allotting the FPO. Now, the reason behind the bearish trend of the market seized to exist and yes the market had to rise.
After the correction point, it was as if every one was waiting for the right time to invest in the stocks. People started flooding money into Banking Sector looking for bonus and right shares. As always, fixation of local election had a positive impact on the share market. Similarly, price of insurance companies also boomed as the news of increment in paid up capital of shares of both life and non life insurance came into the market. Price of micro finance increased because people were expecting it reach the high band price in which it was traded before the bearish trend. In the meanwhile index increased to 1700 plus in a matter of just two months.
Some questions and answers:-
1. Were the share underpriced when the index was 1218?
- No. In fact even then the market price was several multiple of the book value of the shares. Yes, its true that the market price need not be equal to the intrinsic/book value of the share but the multiple needs to be justified by the future prospects of return. Not many stocks justify the multiple with their future prospects of the return.
2. So why did the price of shares rise when the liquidity was restored?
- Because, people felt the shares are available for cheap and they will again reach the height in which they were traded in the past.
3. The index rose from 1200-1700 but has operation of any industry improved at such drastic rate?
- No.
4. Has the EPS of any company improved by such measures or even half?
- No.
5. Do people even see the audited financials of the company or consider the PE ratio before investing their hard earned money?
- Hardly 5% of the investors do.
6. So, what do people consider?
- Right and Bonus shares.
(Yes right and bonus shares have to be considered. But, a big BUT, they will increase the number of shares reducing the EPS of the company. The only way to maintain the EPS is to increase the turnover and the earning of the company but is it always possible? Isn't that market saturated?)
Well i'm glad people are earning bucks in such a short period. But the question is for how long? The share of a company which has negative reserve in its book and was traded at 300 in February is traded at 500 plus in april just because it is providing right shares. In this game where most people are in pursuit of short term gain, not everyone can be a winner. A gain of one person becomes the loss of other. And it is usually the middle class who losses. The only way both party wins is when the underlying stock performs better. However, people hardly analyze the underlying. All they do is go with the flow of the market as in herd of sheep and their intuitions. I'm afraid we'll see some back to back lower circuit breakers in the months to come and some middle class investors will feel the hardest of the impact.
-CA Ubhek Kumar Shrestha
11th April 2017
After the correction point, it was as if every one was waiting for the right time to invest in the stocks. People started flooding money into Banking Sector looking for bonus and right shares. As always, fixation of local election had a positive impact on the share market. Similarly, price of insurance companies also boomed as the news of increment in paid up capital of shares of both life and non life insurance came into the market. Price of micro finance increased because people were expecting it reach the high band price in which it was traded before the bearish trend. In the meanwhile index increased to 1700 plus in a matter of just two months.
Some questions and answers:-
1. Were the share underpriced when the index was 1218?
- No. In fact even then the market price was several multiple of the book value of the shares. Yes, its true that the market price need not be equal to the intrinsic/book value of the share but the multiple needs to be justified by the future prospects of return. Not many stocks justify the multiple with their future prospects of the return.
2. So why did the price of shares rise when the liquidity was restored?
- Because, people felt the shares are available for cheap and they will again reach the height in which they were traded in the past.
3. The index rose from 1200-1700 but has operation of any industry improved at such drastic rate?
- No.
4. Has the EPS of any company improved by such measures or even half?
- No.
5. Do people even see the audited financials of the company or consider the PE ratio before investing their hard earned money?
- Hardly 5% of the investors do.
6. So, what do people consider?
- Right and Bonus shares.
(Yes right and bonus shares have to be considered. But, a big BUT, they will increase the number of shares reducing the EPS of the company. The only way to maintain the EPS is to increase the turnover and the earning of the company but is it always possible? Isn't that market saturated?)
Well i'm glad people are earning bucks in such a short period. But the question is for how long? The share of a company which has negative reserve in its book and was traded at 300 in February is traded at 500 plus in april just because it is providing right shares. In this game where most people are in pursuit of short term gain, not everyone can be a winner. A gain of one person becomes the loss of other. And it is usually the middle class who losses. The only way both party wins is when the underlying stock performs better. However, people hardly analyze the underlying. All they do is go with the flow of the market as in herd of sheep and their intuitions. I'm afraid we'll see some back to back lower circuit breakers in the months to come and some middle class investors will feel the hardest of the impact.
-CA Ubhek Kumar Shrestha
11th April 2017
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