After several months of lethargic action, the Nepal Stock Exchange (NEPSE) last month suddenly came alive. In a couple of months, its market capitalisation—currently just north of Rs1,700 billion—expanded by Rs300 billion. That is a lot in a Rs3,500 billion nominal economy. Frustrated bulls will no doubt take it. NEPSE’s all-time high was recorded as far back as July 2016; the latest strength has been a long time coming. But it is hard to determine what set it off. Was the move driven by fundamentals (tied to the intrinsic value of companies) or was it technicals (using patterns and trends of stocks’ charts to estimate future price potential), or something else? From the available data, it is hard to tell who is behind all the buying. January’s data has taken on importance.

Between July 2016 when it peaked at 1888 and last March, NEPSE collapsed nearly 42 percent. Months before the March 5 intraday low of 1098.95, bids were showing up around 1100. That low was tested again on November 25, 2019, when the index dropped to 1102.46, before rising. Technically, this was a textbook example of a successful test, and likely laid the foundation for what was to follow in the subsequent weeks. From that November low through the intraday high of 1359.32 on January 20 this year, NEPSE jumped north of 23 percent.

Price surge supported by volume

For several weeks leading up to last November, daily volume routinely dropped below Rs200 million. Sellers looked exhausted. Activity began to pick up in December and surged in January. Momentum has continued this month. There were 22 trading sessions last month, of which 13 exceeded Rs1 billion. There was one session with Rs373 million, the rest were all above Rs500 million, with one topping Rs2 billion. February began with another Rs2 billion session. The upward thrust in price is confirmed by volume.

In mature markets, investors look for institutional footprints, because they are the ones with capital. In general, when institutions are building positions, buying pressure sustains. In Nepal, the dynamics are a little different. NEPSE only began trading in January 1994. There are no institutional heavyweights to speak of. As of mid-December last year, there were 17 mutual funds that invest in securities, with Rs17 billion under management. Of this, Rs5.1 billion was parked in money-market instruments (mostly bank deposits), which, at least in theory, can be put into stocks. As of mid-July last year, when the fiscal year 2018-19 ended, insurance companies held Rs347.2 billion in assets. But as far as stocks are concerned, only Rs283.9 billion is relevant. That is the amount in technical reserve, 10 percent of which is allowed to be invested in publicly listed securities—around Rs28 billion.

The other two big honchos are the Employees Provident Fund (EPF) and the Citizen Investment Trust (CIT). As of mid-July last year, EPF’s assets totalled Rs342.7 billion. Of this, Rs22.5 billion was invested in stocks, another Rs76.7 billion was in fixed deposits, and merely Rs3.2 billion was liquid (cash and cash equivalents). At CIT, mid-July assets were Rs148.9 billion, of which Rs6.9 billion was invested in shares and debentures, and Rs6 billion was liquid. Last but not the least, as of mid-July, the Army Welfare Fund had Rs44.2 billion. Of this, Rs38.6 billion was deposited with various commercial and development banks.

The point is, these institutions collectively do manage sizable funds. But, at the same time, the available data is a little outdated, and not much is readily available that could potentially find a home in stocks. In terms of ready availability, banks and financial institutions (BFIs)—comprised of 27 Class A commercial banks, 24 Class B development banks and 22 Class C finance companies—held Rs265 billion in current deposits as of mid-December (out of total deposits of Rs3,475 billion); these are funds that can be withdrawn anytime. Mid-January numbers will be out shortly and will be telling if they fell by a decent amount. These institutions also held Rs1,671 billion in fixed deposits. As they mature, they can be put to use elsewhere.

Speaking of BFIs, they had Rs180 billion invested in ‘share & other investment’ as of mid-December. The mid-January report in this regard will be revealing. More importantly, ‘margin nature loan’ totalled Rs44.6 billion mid-December. These are loans issued against the collateral of securities, such as shares and bonds. BFIs can issue up to 40 percent of their primary capital—comprised of equity capital and disclosed reserves—in these loans, which translate to Rs200 billion. So upwards of Rs150 billion can potentially move into stocks. Plus, beginning last September, the Securities Board of Nepal allowed 21 of the 50 brokers to issue margin loans. Of the 21, only three have begun doing so.

Healthy if institutional ownership rises

For lack of sufficient data, it is hard to wrap one’s mind around who may be behind all this buying. Short squeeze, when shorts are forced to buy back causing excess demand, is not a contributing factor for sure. This is because shorting itself is not allowed in Nepal. Shorting, or short selling, is a practice where customers sell borrowed shares hoping to buy them back at a lower price. But if the price goes the other way, short-sellers may be forced to liquidate their positions, also called covering, which then puts upward pressure on the stock.

Interestingly, the ongoing rally has unfolded in the midst of softer economic data—relative to how things were a year or two ago—including lesser demand for bank loans. More often than not, the collective wisdom of markets tends to look ahead. Major bottoms are formed when the news is at its worst. If this is what is driving stocks higher, fundamentals need to improve in the months or quarters to come.

Otherwise, odds will have risen that large individual accounts are taking advantage of improving chart patterns, and in so doing trying to take small accounts for a ride. In the past, because it was in its infancy, the stock market was essentially under the beck and call of a handful few. It is less so now, but large stock investors still have clout. This is why the market needs institutions such as insurance companies and mutual and pension funds to increase their equity allocation. The mid-January numbers will tell us whether or not individual accounts played a role. What bulls do not want to see happen is a surge in margin lending because it cuts both ways: it helps in an uptrend, but losses get quickly exacerbated in a downtrend.