Financial Leverage and Risks on Stock Market

 

According to statistics, the Vietnamese stock market witnessed many records in September. Average daily trading value surpassed the benchmark of VND5,000 billion on both the Ho Chi Minh Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX) in the week from September 21 to 25. On HOSE, quoted trading volume reached 75.87 million shares valued at VND3,705 billion on average. On HNX, the quoted trading volume averaged at 41 million shares worth VND1,621 billion. On average, more than VND5,300 billion was injected into the stock market a day.

Domestic investors are leading the marketAccording to statistics, the quoted trading value, which affected the stock and index values, amounted to VND26,285 billion on both bourses in the last week of September. This was a weekly record. If put-through (negotiation) trading was included, the value soared to VND27,026.9 billion.

 

In addition to the value, the traded volume was also very high of 118.26 million units per session. Clearly, money is still being channelled into the stock market although share prices are much higher than in August.

 

In September, the trading value surged. The quoted trading value averaged at VND4,402 billion per session in the first 19 trading sessions of September. The VN-Index added 6.42 % and the HNX-Index climbed 6.54 %. The May and June rally, one of the most impressive periods of the Vietnamese stock market, only had an average trading value of VND2,627.3 billion per session. Definitely, the stock market remains one of the most effective investment channels at present.

 

At peak, the trading volume on HOSE approximated 92 million units on September 23 at a all-time high value of VND4,533.48 billion. On HNX, the volume also surged to over 54 million shares valued at VND2,214.94 billion. The total of VND6,748.42 billion intraday value on September 23 seemed to be a hard record to be broken.

 

Remarkably, foreign investors are net sellers during the most active period of the Vietnamese stock market.

 

According to Artex Securities Joint Stock Company (ART),trading value of foreign investors only accounted for 5 % to 8 % of the market value, a two-thirds drop from a year earlier. In terms of value, foreign investors are spending 2.5 times higher than when the market was moving around the bottom. However, this did not make them the market leader. Domestic investors remain the principal with more than 90 % of the market value.

 

There are a host of reasons for net selling by foreign investors such as profit-taking purpose, the liquidation of Indochina Capital Fund and portfolio restructure. Besides, they also fear risks.

Stock money from banks?
The market rally encouraged more investors to join the market but a considerable force is seen from banks such as lending and collateralisation services. With a strong belief in the rally, market makers are very active in these services.

 

Many investors said they had never seen such simple use of financial leverages for stock trading as in the past months. Securities companies are offering a wide range of services, though labelled different names, to their customers from small players to VIPs. Money advances help quicken capital turnover. Securities brokerages also directly use bank loans to help investors to strengthen their financial positions through “listed securities investment and trading contracts” which are, in fact, broker houses lend money for interest rate taking.

 

The most common financial leverage is the lending from securities companies, which is usually equal to 50 % of investors’ equity. For instance, an investor has VND1 billion and he/she can borrow up to VND500 million for stock investing. Many securities companies are offering very attractive financial leverages. Several companies even support up to three times of mortgage value. Besides, securities brokers also introduce other financing services for investors such as advance, repo and guaranteed loan. The money advance is usually charged a daily interest rate of 0.04 % but several brokers do not take the interest if investors settle the advance within the day.

 

Such services are used to attract customers by securities companies. All stock brokers bear no responsible for any losses arising from executing the contracts but taking a fixed margin on shared capital value. They are also entitled full power to liquidate contracts and preserve shared capital. Thus, the leverage will create hefty profits if the market is favourable.

 

In Vietnam, short sale is disallowed; thus, investors mainly execute margin trading. Margin trading is the buying or selling of securities with cash borrowed from a broker, using other securities as collateral. Investors only need a portion of the total cash needed to buy securities and the remainder is provided by securities firms. With high delight and confidence in stock market rally, the financial leverage through margin trading has given a boost to the rising market. This type of trading helps stabilise securities prices and increase liquidity but carries high risks that may harm the market activities.

 

According to experts, the financial leverage is an important factor that may lead to excessive responses. The trading value over the past two or three months shows that leveraged money is being injected into the stock market.

 

Real risks
Several specialists have warned that investors should be careful with the use of financial leverages to avoid paying dear prices as in early 2008 if the market lacked strong growth foundations.

 

It is clearly impossible to measure the size of financial leverages in use. According to Saigon Securities Inc (SSI) last week, credits from banks injected into the stock market reached VND19,000 billion. Although the lending limit was still lower than the cap of 20 % on commercial banks’ chartered capital, outstanding loans of stock market capitalisation approximated 80 % of the peak value in early 2007.

 

The financial leverage creates high demand in the uptrend market but it also intensifies selling pressure in the downtrend market. Bright prospects of the economy in general and the stock market in particular in the long term strengthen the trust of both investors and securities brokers. However, the greed used to stir up the Vietnamese fledging stock market nearly one year ago while many investors accepted to abandon their collaterals. 
P.V