Familiar with the Bulls and Bears: But what about the Others?

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Familiar with the Bulls and Bears: But what about the Others?

There is a story of how each year got its name and it also explains why there is no year of the cat as well as why cats hate rats so much.

--BY SUSHIL MAHARJAN

Thanks to Nepal’s capital formation efforts, the Nepal Stock Exchange (NEPSE) celebrated 25 glorious years since it opened its trading floor on 13 January 1994 to impart free marketability and liquidity to the government and corporate securities. NEPSE facilitates full trading on Nepal’s premier equities exchange with its trading floor through its members, market intermediaries, brokers, market makers, among others. Accessing markets is possible as NEPSE has classified equities into 12 major types: Commercial Banks, Development Banks, Finance, Microfinance, Life Insurance, Non-life Insurance, Hydropower, Hotels, Manufacturing, Mutual Funds and Others.  It has 334 listed participating organisations (scrips) and a market capitalisation of USD12.779 billion.  In addition, NEPSE underwrites new issues and provides a market for companies wanting to become publicly traded.

Looking at the history of the NEPSE index over the past ten years, it has seen both its ups and downs.  The fiscal year (FY) 2009/2010 saw the following - High: 739.02, Low: 405.45, Year-end: 477.73, Overall point change: 271.37. Compare that with FY2018/2019 - High: 1349.38, Low: 1098.95, Year-end: 1259.01, Overall point change: 46.65.  It is believed that FY2009/2010 was when the Nepali stock market slid into its bearish period, due to market interest rates, the supply of money, lack of public confidence, the economic policies of Nepal, a major cooling of the real estate market and other reasons. After that, the NEPSE index started to rise in the following two years to reach its utmost peak of 1881.45 in FY2016/2017 but fell sharply afterwards. The year FY2018/2019 saw the index fluctuate between the 1,100 and 1,300 levels, before crossing the 1,300 mark.

Nepal government launched the Visit Nepal Year 2020 campaign targeting to welcome two million tourists, focusing on Nepal’s culture, heritage and lifestyle while promoting tourism in the country. During the same period, the focus of investors appears to have shifted to stocks.  The NEPSE index closed on January 1, 2020 at 1169.50 points on a single-day trading of Rs 372.99 million.  At the same time last year, it closed at 1196.18 points on a single-day trading of Rs 227.17 million.  There is reason for optimism as the NEPSE index surged to an all-new 2020 high on March 1 at 1667.74 points on a single-day trading of Rs 4.84 billion, a bullish sign.  As Finance Minister Dr Yubraj Khatiwada has appealed to financial institutions time and time again to increase investment in the share market to facilitate the economic development of the country, it is an appropriate time to invest in the stock market  due to Nepal’s political stability, its increased economic activities and low interest rates at its banks and financial institutions.  And of course, we have seen the biggest merger in Nepal’s commercial banking sector between Global IME Bank and Janata Bank, creating the biggest bank in terms of capital, deposits and asset loans.

We have seen the fear of Corona virus (COVID-19) slowly knock down North American, European and Asian stock markets. We have yet to see the impact on Nepal’s financial and capital markets, we have seen global stock markets officially enter a bear market and effects can be seen in NEPSE, falling from a peak just at the beginning March 2020. Stock market prices reflect expectations of future profit of investors and investors see the coronavirus dampening economic activity the world over and in Nepal, but in what way?  The coronavirus is sweeping across the world as the World Health Organization (WHO) has declared coronavirus as a pandemic.  This has brought a lot of unknowns and uncertainties into our lives. International Monetary Fund (IMF) mentioned that never has the economy been hit as hard as this, witnessing the economy coming to a standstill. Further the global economy has now entered a recession that could be as bad or worse than the 2009 financial downturn.  On Wall Street, the S&P 500 and Dow Jones were down at least 25 percent from all-time highs of February 2020. Staying healthy and informed is what matters, as is staying the course during the market’s ups and downs.  We believe in what history has taught us; the market usually bounces back, and those who stay invested have realised gains over the long term.  Selling at low values locks in an investor’s losses yet timing the market rebound is just as hard as predicting a market downturn.

We are aware of Chinese astrology; each year is named after an animal, and babies born in that year take on some of the animal’s characteristics. There is a story of how each year got its name and it also explains why there is no year of the cat as well as why cats hate rats so much.  Chinese astrology is organised into 12 animal signs: rat, ox, tiger, rabbit, dragon, snake, horse, sheep, monkey, rooster, dog and pig.  If we apply Chinese astrology and its years named after animals, we can easily talk about the stock market.  We have to believe the market is full of these animals, as their names can signify an individual’s investment approach, philosophy or strategy.

Bull in the Stock Market: A dealer in the stock market who expects prices to rise is called a bull. A bull market is one in which dealers are more likely to be buyers than sellers, even to the extent of buying for his or her own account and establishing a long position. A bull with a long position hopes to sell assets at a higher price after the market has risen. A bull position or long position occurs when the bull owns his or her securities. We have seen the NEPSE index cross the 1800 mark towards its all-time high during the middle of 2016, so we believed the economy was growing and so was investor confidence in anticipation of market growth.

Bear in the Stock Market: A bear is a dealer in the stock market who expects prices to fall.  A bear market is one in which a dealer is more likely to sell securities, currencies or goods, even without having them.  This is known as selling short or establishing a bear position. The bear hopes to close or cover a short position by purchasing at a lower price the securities, currency or goods which had already been sold.  The difference between the purchase price and original sale price represents the successful bear’s profit. A concerted attempt to force prices down by a powerful bear or a group of them by resorting to sustained selling is called a bear raid.  If successful, the stock market is expected to be lower in the future.  We have also seen the peak after the bull trend, as the market plunged 40% on average, closing at the 1100 level during the first quarter of 2019, so we believed the economy had weakened or was expected to weaken.  

Chicken in the stock market: Chickens are afraid to lose anything in the market or are risk-averse by nature.  These investors are fearful of the stock market and mostly stick to safer financial instruments like fixed and corporate deposits.  Fear overrides the need to make profit and so they turn only to money-market securities or get out of the markets altogether. While it’s true that investors should never invest in something which makes them lose sleep, investors are also guaranteed never to see any return by avoiding the market completely and never taking any risk.  We believe chickens have no specific plan and are driven by the fear of losing money. The demand of their market is very high when interest rates increase, leading to greater investment in financial instruments such as fixed deposits.  This we have seen in the past; during these periods, there is no significant movement in the stock market.

Jobber in the stock market: A jobber is an independent securities dealer who buys and sells securities personally or for a group’s own name in order to profit very quickly.  Investors are not allowed to deal with dealers directly. Stock jobbing is a short-term investment strategy that operates on the assumption of liquid markets. This practice, when done over and over by a large number of stock jobbers as aggressive scalpers, can lead to a situation in which prices for securities rise far above their actual value, creating a speculative bubble.

For example: an investor places multiple orders (with a few rupees difference between them) with a compulsory stop-loss; he or she buys a stock at Rs.125 and sells it at Rs. 130 with a stop-loss at Rs.135.  If the stock price moves up to between Rs. 130 and Rs. 135, then the sell orders are executed and profits are made.  If the stock price moves down to Rs. 115, then the stop-loss order is executed.  This way, the investor keeps their trade volume high and earns some profits.  This will be done from 25 to 50 times a day or a week by a single investor or a group of them, with more successful sell orders than stop-losses.

Pig in the stock market: Pigs are high-risk investors looking for the one ‘big’ score in a short period of time.  They buy on hot tips and invest in companies without doing their due diligence.  However, there are investors who are looking for insider information or non-public details about a publicly traded company in order to gain an advantage.  Pigs get impatient, greedy, and emotional about their investments. They are drawn to high-risk securities without putting in the proper time or thought to learn about these investment vehicles. Professional portfolio management firms and traders love the pigs, as it is often from their losses that the bulls and bears reap their profits. We believe pigs only think of themselves when managing their portfolios.

Stag in the stock market: A stag is a speculator who buys a large number of shares in a new issue, especially an Initial Public Offering (IPO), if an investor thinks the price is likely to rise above the offer price when trading in the scrip on the stock exchange.  For example, during a new initial public offering of a microfinance firm, an investor will remember the outstanding response to its IPO and will believe that because Laghubitta is traded in the secondary market, shares in the new IPO will trade at five times its face value.

If stock investors have a realistic plan, they are probably not pigs or chickens. It means investors have used sound, available information and are heading towards their investment goals.  As investors age, these goals can also change from accumulation to income. We believe stags are day traders and short-term investors who attempt to earn profits from market movements by quickly moving in and out their own positions. In closing, I hope this article covers all of the aspects of bulls and bears, as well as the others, in the stock market.

Maharjan is Deputy CEO of Civil Capital Market Limited. The views expressed in this article are those of the author and are not necessarily those of Civil Capital Market Ltd. or New Business Age.

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