NEPSE Loses Its Usual Mid-Year Momentum as Liquidity Fails to Reach the Market

Kathmandu — July and August have often been closely watched months in Nepal’s stock market. Several major rallies in the past reached important milestones during this period, while the publication of fourth-quarter financial statements and expectations of dividend announcements traditionally helped strengthen investor sentiment. This year, however, the Nepal Stock Exchange has failed to reproduce that familiar momentum.

The benchmark index remained under pressure through much of July and has continued to trade without a convincing upward direction in August. After hovering around the 2,650-point area in July, the market made several short-lived attempts to recover, but the gains could not be sustained. The index has since retreated to around 2,641 points, indicating that investors remain reluctant to take aggressive positions despite conditions that would normally be considered supportive of equities.

The weakness is particularly notable because the July-to-October period is generally associated with corporate earnings and dividend expectations. Listed companies begin publishing their fourth-quarter financial statements during this period, giving investors a clearer picture of annual profitability, distributable earnings and possible dividend capacity. Historically, anticipation of those disclosures has encouraged buying before formal dividend announcements.

This year, that expectation alone has not been strong enough to generate meaningful demand.

Market participants say the absence of a strong rally reflects a broader problem: financial results may be gradually improving, but investor confidence has not improved at the same pace. Political uncertainty, questions over the direction of economic policy and weak participation by large investors have reduced the willingness to commit fresh capital.

Ramendra Rayamajhi, president of the Merchant Bankers Association and chief executive officer of NIC Asia Capital, has argued that this period was traditionally considered a dividend-buying season. In previous years, investors often positioned themselves in advance, expecting both dividend income and capital appreciation. The present environment, however, is different.

According to Rayamajhi, political changes and policy uncertainty have encouraged investors to remain in a “wait-and-see” position. Even if the financial position of some listed companies is slowly improving, the absence of broad market confidence has prevented that improvement from translating into a sustained rally.

His observation points to a central feature of equity markets: prices are not determined by earnings alone. Expectations, confidence, liquidity and perceptions about future policy can have an equally strong influence. A company may report improving earnings, but investors may still refuse to pay higher prices if they believe the broader economic or political environment remains uncertain.

Historical rallies make the current weakness more visible

The contrast with earlier market cycles is striking.

In 2008, NEPSE reached a major peak of around 1,175 points in August. The 2016 rally also pushed the market close to the 1,800-point level around the same period. During the historic bull market of 2021, the benchmark index crossed 3,200 points in August.

The rallies of 2024 and 2025 also gained considerable strength around late July and August. These episodes have contributed to a widespread belief among investors that the middle of the year often provides favourable conditions for a market advance.

But the historical pattern should not be interpreted as a fixed seasonal rule.

The fact that several previous peaks occurred in July or August does not mean that the market must rally during these months every year. Those earlier rallies were also supported by factors such as abundant liquidity, strong participation by individual investors, expectations of bonus shares, credit expansion, favourable monetary conditions or strong speculative sentiment.

This year, several of those forces appear weaker.

Although NEPSE recorded gains on a limited number of trading days between July and early August, the upward moves failed to develop into a sustained trend. The market repeatedly lost momentum, suggesting that buyers have not been strong enough to absorb selling pressure for an extended period.

That weakness becomes even clearer when turnover is considered.

Low turnover signals lack of conviction

Investor Sameer Jung Khadka identifies weak trading turnover as one of the most important constraints facing the market. Daily transactions of only around Rs 3 billion to Rs 4 billion, in his assessment, are insufficient to support a strong and durable rally.

The importance of turnover goes beyond the headline transaction figure. Rising prices accompanied by strong turnover generally indicate broad market participation and stronger conviction among buyers. By contrast, an index that rises on limited turnover can quickly reverse because relatively little new capital is supporting the move.

The present market appears closer to the second situation.

Institutional investors have remained relatively inactive, while some large investors are still holding older positions and have limited capacity or willingness to deploy additional funds. Retail investors, meanwhile, appear hesitant to make new commitments after repeated market reversals.

This creates a self-reinforcing cycle. Weak confidence reduces buying. Low buying keeps turnover depressed. Depressed turnover makes rallies look fragile, and fragile rallies further discourage investors from entering the market.

Under such conditions, even positive financial reports may have only a temporary effect on share prices.

Dividend expectations are also changing

Another structural shift is taking place in the way investors view dividends.

Bishma Raj Chalise, chief executive officer of Reliable Capital, notes that banks and financial institutions no longer face the same pressure to raise capital that they did in earlier years. During previous phases of regulatory capital expansion, banks frequently issued bonus shares, and investors came to associate the dividend season with the possibility of receiving additional shares.

That incentive has weakened.

Many banks now have sufficient capital relative to earlier periods, reducing the need to issue large quantities of bonus shares simply to increase paid-up capital. Some institutions may therefore prefer cash dividends, while others may have only limited distributable profit.

For market participants focused primarily on capital gains, cash dividends may be less attractive than bonus shares were during earlier bull cycles.

The issue is not limited to banks. Several companies in other sectors also have limited capacity to distribute large dividends, meaning that the traditional expectation of a broad dividend-driven rally may now be less powerful than it once was.

This represents an important change in Nepal’s market structure.

A decade ago, expectations of bonus shares could themselves become a major speculative driver. Investors frequently purchased shares before book closure dates in anticipation of bonus issuance, sometimes pushing valuations sharply higher. As capital requirements stabilise and companies become less dependent on bonus shares, that particular source of demand is becoming weaker.

Plenty of banking liquidity, but little of it is entering stocks

One of the biggest puzzles in the present market is the apparent disconnect between banking-system liquidity and stock-market liquidity.

The banking system may have sufficient loanable funds, but that does not automatically mean money will flow into equities.

Chalise has pointed out that the major problem is not simply whether liquidity exists, but whether it is reaching the secondary market. At present, that transmission appears weak.

This distinction is crucial.

Banking liquidity refers to the availability of funds within financial institutions. Stock-market liquidity, however, depends on investors actually allocating those funds to shares. If businesses remain cautious, households prefer deposits, investors fear further market declines, or borrowing for equity investment remains unattractive, surplus banking liquidity can coexist with weak stock turnover.

That appears to be one of the defining features of the present environment.

The sluggish property market has further weakened the flow of capital into equities. In earlier periods, profits generated from land and housing transactions frequently moved into the stock market. When property transactions were strong, investors who sold real estate had large pools of investable cash available for alternative assets.

With real-estate activity now subdued, that channel has weakened substantially.

The result is that two important domestic sources of speculative capital — leveraged investment and money recycled from property transactions — are less visible than during previous rallies.

Market psychology remains fragile

The present weakness cannot be explained solely through company fundamentals.

The behaviour of investors suggests that psychology has become one of the strongest constraints on the market.

Repeated failed rallies have made investors cautious. Those who entered the market at higher prices may prefer to sell when prices recover slightly, creating resistance whenever NEPSE attempts to move upward. Meanwhile, potential new investors may remain on the sidelines waiting for a clearer trend.

This produces a market in which good news is often used as an opportunity to exit rather than as a reason to accumulate shares.

Such behaviour can prevent an index from sustaining momentum even when economic conditions are not deteriorating materially.

For a stronger rally to emerge, the market would likely need not just positive financial reports but a broader shift in expectations. Investors would need to believe that future returns justify taking additional risk.

That change has yet to become visible.

Why August still matters — but less than investors assume

Despite the weak start to the month, some market analysts argue that it would be premature to declare the traditional August rally completely absent.

Several past bull markets gained momentum in the middle or latter part of August rather than at the beginning of the month. Fourth-quarter reports are still being published, dividend expectations are still developing and investors may react differently once the profitability of major listed companies becomes clearer.

But any comparison with earlier bull markets requires caution.

Historical timing alone cannot generate a rally.

For NEPSE to move substantially higher, three conditions appear increasingly important: fresh money must enter the market, investor confidence must strengthen and the policy environment must become more predictable.

Without those conditions, strong corporate earnings or dividend announcements may produce only stock-specific gains rather than a broad market advance.

The market could therefore remain selective. Companies with strong balance sheets, credible dividend capacity and improving earnings may attract buyers, while weaker firms may continue to trade without meaningful support.

That would represent a significant departure from the broad-based speculative rallies Nepal has experienced in some previous cycles.

The deeper message from the current market

The unusual weakness of NEPSE during a period traditionally associated with optimism may indicate that Nepal’s stock market is becoming less responsive to seasonal expectations and more dependent on underlying liquidity and confidence.

That is not necessarily a negative structural development.

A market driven primarily by expectations of bonus shares, seasonal speculation or historical patterns can become disconnected from company fundamentals. If investors increasingly distinguish between firms on the basis of profitability, cash flow, governance and sustainable dividend capacity, price discovery could eventually become more disciplined.

But the current phase also carries risks.

Persistent low turnover can reduce market depth, weaken investor participation and make price movements more volatile. If institutional investors remain passive and new capital stays away, even fundamentally strong companies may struggle to achieve fair valuations.

For now, the market appears to be caught between improving expectations and weak conviction.

The ingredients normally associated with the dividend season are present: fourth-quarter results, discussions over dividend capacity and sufficient liquidity in the financial system. What is missing is the willingness of investors to convert those conditions into aggressive buying.

That is why this August looks different.

The question is no longer simply whether listed companies will report better profits or announce dividends. The more important question is whether investors will believe those improvements are strong enough — and durable enough — to justify putting fresh money back into the market.

Until that confidence returns, Nepal’s share market may continue to trade around familiar levels even during a season that once carried much stronger expectations of a rally.