Stock Market Strongly Absorbs Foreign Capital Flows

1:54:00 PM | 25/4/2019

Ending the trading session on April 16, VN-Index stopped at 977.17 points, about 19% lower than the benchmark of 1,204,33 points that VN-Index established a year ago, which leaves VN-Index with the second largest decrease in the world in the period.

On April 9, 2018, the VN-Index marked a milestone when closing at 1,204.33 points, the highest ever.

After making a record level, the market also started to enter a prolonged adjustment period, which caused VN-Index to fall to 860 points at the beginning of 2019. Negative developments in 2018 resulted in the negative NAV/share rate.

Explaining the downward direction of the stock market, many reasons are given. In particular, most experts agree that the U.S.-China trade strategy has made a negative impact on the global financial market and Vietnam cannot stay out of that vortex. Besides, Federal Reserve System (Fed) raised interest rates four times in 2018, causing capital flow withdrawal from emerging and marginal markets. This has a negative impact on Vietnam stock market. Besides, for the first time in more than a decade, the U.S. Treasury bond interest rate reversal at the end of 2018 also made investors worried about the economic recession that could take place.

In 2018, the stock market was also affected by the plunging oil price; after the peak at US$75/barrel in October 2018, oil price entered a period of plunge when it stood at US$42/barrel at the end of the year. In addition, Vietnam's stock market is also affected by an objective reason from the market itself that the pressure of profit-taking increased after a period of time VN-Index was considered fast growth. At the time when VN-Index created a peak, the P/E index reached nearly 22, which is considered a relatively high number for regional markets. But since the beginning of 2019, P/E Vn-Index has cooled significantly and remained at 14.x.

Many bright spots

Entering 2019, the stock market has shown a lot of positive signals. After a period of tension in U.S.-China relations, the trade war between these two countries has changed in a more positive way. President Donald Trump's senior economic adviser recently said that the United States and China are getting closer to a trade deal.

Another positive macro information is that after a period of strong interest rate increase in 2018, Fed has signaled not raising interest rates in 2019. Even President Trump called on Fed to lower interest rates. This will be the basis to believe that cash flow will return to the stock market.

In the first quarter of 2019, cash flow is pouring quite strongly into the marginal and emerging market and in which foreign investors' net buying volume in Vietnam stock market is increasing sharply, reaching nearly VND5,000 billion.

According to the report by the Ministry of Finance, as of March 18, the stock market's scale reached over 81% of GDP, up 14% compared to the end of 2018.

The Ministry of Finance is also submitting to the Prime Minister for approval the establishment of the Vietnam Stock Exchange and the scheme of restructuring the stock market and insurance market by 2020, with a vision to 2025.

Mr. Pham Hong Son, Vice Chairman of the State Securities Commission (SSC), gave more information about the Project of establishing Vietnam Stock Exchange. On January 7, 2019, the Prime Minister issued Decision 32 approving the Scheme on the establishment of Vietnam Stock Exchange. On that basis, the Ministry of Finance is also preparing a draft decision and charter for the establishment of Vietnam Stock Exchange. These two documents will be submitted to the Government in the coming time.

In addition, the plan of implementing Government Bond Futures and Guaranteed Warrants (CW) and preparatory work has been basically completed. These two products will be launched in the second quarter of 2019. Before implementation, the SSC will well communicate it investors and securities companies. Besides, there will also be training and propaganda sessions so that investors can participate.

By the end of the first quarter of 2019, Vietnam's macro economy remained stable with GDP growth estimated to reach 6.9%, which is a bright spot in attracting investment in the region. Vietnam's stock market is still relatively attractive when the P/E VN-Index is 16.8, significantly lower than the Thai market (SET - P/E 17.1), Indonesia (JCI - P/E 21), Malaysia (KLCI - P/E 20.6), the Philippines (PSEi - P/E 19.6).

Besides, the Vietnamese market is also expected to increase its proportion in the Frontier Market basket when the markets of Argentina and Kuwait are upgraded to Emerging Markets, which leads to the strong buying of foreign stocks by foreign investors. According to estimates, the increase in the proportion of MSCI Frontier Market index has helped the Vietnamese market to gain about US$500 million by the buying of foreign investors.

Finally, the story of upgrading into emerging market in the coming years is still a factor to help the domestic market improve in quality, as well as attract more foreign capital.

Luong Tuan