Eastern Unrest Halts NEPSE Rally: Investor Confidence Wanes Amidst Communal Tensions

The Nepal Stock Exchange (NEPSE) has experienced an unexpected downturn, abruptly halting its recent upward trajectory, primarily due to escalating communal tensions in Eastern Nepal. What appeared to be a promising rally for the Nepali stock market has been overshadowed by socio-political unrest, leading to a noticeable decline in investor confidence and market activity.

The unrest, which originated in Dewanganj, Sunsari, and subsequently spread to various parts of Koshi Province, has created a palpable psychological impact on the capital market. The initial enthusiasm among buyers, evident just a few days prior, has gradually dissipated, resulting in a continuous fall in the NEPSE index. This sentiment shift underscores the delicate balance between economic fundamentals and socio-political stability in influencing market dynamics.

Sagar Dhakal, Chairman of the Stock Broker Association of Nepal, confirmed that the primary driver behind the market's recent decline is indeed this escalating tension. He emphasized that there are no other significant economic or policy-related factors currently exerting a negative influence on the market. "There is no other reason for the decline. The ongoing tension in the East is the main reason for the stock market's fall," Dhakal stated, highlighting the direct correlation between regional stability and market performance. Other market participants echo this sentiment, noting that the growing communal tension has significantly weakened investor morale.

The clashes in Dewanganj, Sunsari, which began on July 26th, led to the imposition of a curfew. Subsequently, security alerts were heightened in Morang, Jhapa, and surrounding areas. As of Thursday, the situation in some parts of the East had not fully normalized, contributing to sustained selling pressure on NEPSE. This period of uncertainty has been directly reflected in the market's performance.

Technical analysis further corroborates the psychological shift observed in the market. According to daily candlestick charts, NEPSE had recently shown a strong upward climb, rising from approximately 2550 points to the 2740-2750 point range. During this ascent, a series of green candlesticks were formed, accompanied by increasing trading volumes, clearly indicating strong buyer control and a bullish trend. However, following the emergence of the tension, the market's momentum abruptly reversed. The upward trajectory weakened, giving way to a succession of red candlesticks. What initially appeared to be a minor correction gradually transformed into persistent selling pressure. Over the past few trading days, the market has consistently closed at lower levels. In the last four trading days alone, the index has shed 62.02 points. On Thursday's trading session, NEPSE closed at 2672.58 points, down 16.30 points (0.61%). Despite reaching 2695.86 points during the day, the index failed to sustain this level, ultimately closing in the lower range, signaling strong selling pressure at higher price points.

Another critical aspect observed in the charts is the trend in trading volume. While the market was rapidly climbing, trading volumes had increased significantly. Even as the market began to decline, volumes remained above average. Analysts interpret this as not merely profit-booking but also an increase in the number of investors selling shares to mitigate potential risks. Technically, the market appears to have exited its short-term upward trend. The continuous formation of small red candlesticks indicates that sellers are more active than buyers. The inability of the market to sustain any upward attempts and its subsequent retreat signal a weakening of investor confidence.

In capital markets, psychological factors are often as crucial as economic indicators. Major political crises, natural disasters, or social instability often prompt investors to reduce their risk exposure, with direct consequences for the stock market. This psychological impact is particularly pronounced in markets like Nepal, which are dominated by individual investors. Following such events, many investors tend to halt new purchases, some secure profits, and others sell shares to avoid potential risks. This creates a situation where emotional responses often outweigh fundamental economic rationale.

However, market experts advise long-term investors against making decisions based solely on immediate events. They suggest that once communal tensions are brought under control and normalcy returns, investor confidence is likely to improve again. In such a scenario, the current selling pressure in the market could subside. Conversely, if the tensions persist and begin to affect broader economic activities, their impact on the capital market could linger for an extended period. Currently, investors appear to be adopting a "wait and see" strategy rather than taking on new risks.

The market's direction in the coming trading days will largely depend on the security situation in the East, the restoration of investor confidence, and the pace at which buyers return to the market. For now, both technical indicators and market behavior convey a clear message: the upward momentum has been halted, and investors remain in a cautious state of mind.