Buy & Hold: Strategy for Now

Friday - 6th March, 2009 | ResCon

Over the past few weeks, we presented “up-to second quarter performance” reports of Financial Institutions (esp., Commercial Banks, Development Banks and Finance Companies). Our main focus all these days were to study the performance of various companies and come up with distinct steps to move ahead. If you missed, we have presented a summary along with respective links below. Please follow the links to take a look at the reports.

Summary:

  1. Net profit of Commercial Banks has increased by 170% on an average

  2. Net profit of Development Banks has increased by 191%  on an average

  3. Net profit of Finance Companies has increased by 174% on an average

In gist, most of the commercial banks, development banks and finance companies have been performing well even during difficult times. Some of the key factors behind such a good increase in profit figures were found to be booming realty sector, good inflow of remittance, increased exposure to hydropower sector, quality of loans (those not deemed ‘BAD’) in portfolio and focus on SMEs. In addition to this, earlier assumptions of experts also seem to be valid. Radesh Pant, President of Nepal Bankers’ Association and CEO of Bank of Kathmandu; Dr. Chiranjivi Nepal, former chairman of the SEBON and Rewat Bahadur Karki, Chairman of NEPSE had mentioned, at different points, that the present financial crisis would not affect Nepal as it doesn’t have any direct link with the world (taken from ‘A Realty Check’).

Moreover, the “Current Macroeconomic Situation (Based on the First Six Months' Data of 2008/09)” published by NRB supports our conclusion that Nepalese market is fundamentally strong and has, till date, a minimal effect of global financial crisis. We have pointed out some of the key highlights of macroeconomic situation below.

Current Macroeconomics Highlights for the six months of 2008/09 as published by NRB:

  1. Exports rose by 18.60% in the first half of 2008/09 in contrast to a decline of 3.20% in the corresponding period of the previous year.

  2. Workers’ remittances soared by 65.30% in the first six months of 2008/09 compared to the growth of 18.20% in the corresponding period of the previous year.

  3. Total imports went up by 23.60% compared to an increase of 14.20% in the corresponding period of the previous year.

  4. The overall BOP recorded a significant surplus of Rs. 28.5 billion compared to a deficit of Rs. 2.0 billion in the corresponding period of the previous year.

  5. The government budget recorded a surplus of Rs. 7.4 billion in contrast to a deficit of Rs. 3.3 billion in the corresponding period of the previous year. The central bank claimed that increase in revenue and foreign cash grants accounted for the budget surplus in the review period.

  6. Revenue mobilization grew by 25.50% to Rs. 59.5 billion compared to an increase of 25.40% in the corresponding period of the previous year.

Well the story we are trying to build here is simple. Our service sector is doing well and so is our macroeconomic performance. Though some economists and IMF (International Monetary Fund) officials suspect that the Nepalese export and remittance to decline gradually due to worsening global economy, we firmly believe that by virtue of being a smaller economy and little closeness to the world, Nepalese economy will be ‘a’ least affected one in the lot. Our macroeconomic data also speak the same. Most suspected sectors- export and remittance are improving in spite of global downturn. Export and remittance have increased by 18.60% and 65.30% in the first six months of 2008/09 compared to the corresponding period of the previous year. Apart from these, Imports, Balance of Payment and Revenue mobilization have also increased significantly.
Thus, even when these data are so exciting, NEPSE has hardly moved promisingly towards the 1000 mark. For the record, NEPSE index fell by a whopping 31% in the first six months of the current fiscal year to 659.81 in mid-January compared to 958.91 a year ago. So what could be the reason behind NEPSE index moving southward? Well there are no concrete answers to that. However, some discouraging government policies (such as VDIS, increment of capital gain tax, etc.) have been found to have negatively impacted the stock market. Even then, such a sharp decline in NEPSE is not warranted for.

Our fundamental research shows that many good companies are currently undervalued. Hence this is the best time to gobble up some of these stocks and earn some good profit in the future. Ideally, the strategy here should be to ‘Buy and Hold’ rather than ‘Trade’.

Please note that fundamental analysis believes that markets may mis-price a security in the short run but eventually the "correction" will take place and stock will be rightly priced. In the meantime, profits can be made by trading the mispriced security and then waiting for the market to recognize its "mistake" and re-price the security. It means that you purchase the good companies’ stock at a low price and wait until the stock’s price will rise or be fundamentally correct.

Thus, we strongly suggest you to buy when the time is right and luckily, the right time is now. So, do your research on companies’ profitability, ratios, future plans, growth potentiality, management etc. and start investing.   

Well if you think you need some professional help, let us know.