Year-end Stock Market 2010: Can We Regain What Has Been Lost?

According to the research department of Wall Street Securities Joint Stock Company, the VN-Index and the HNX-Index dropped 13 % and 20 % in the year to the end of September, respectively. Will the market gauges regain their losses in the remaining two months of 2010? What factors will support and spur the market?

 

According to the government-run General Statistics Office (GSO), Vietnam's GDP in the first nine months of 2010 expanded 6.52 % from a year earlier, the highest growth rate reported monthly. In its Asia Development Outlook Update 2010, the Asian Development Bank (ADB) raised Vietnam’s growth forecast for 2010 from 6.5 % to 6.7 %, while lowering the inflation projection in 2010 to 8.5 %. In general, the report rated the Vietnamese economy positively. However, this factor is only expected to keep the market from falling further.

 

In the first 9 months, more than 140 companies listed shares on the country’s bourses. The new listings, coupled with secondary equity offerings and bonus share issues increased the listed volume from more than 16 billion shares in 2009 to over 21 billion shares in September 2010, up more than 30 %. This rapid supply growth was quickly digested. In the last three months of this year, while supply is expected to continue to grow, the cash flow seems squeezed as banks must increase the capital adequacy ratio (CAR) from 8 % to 9 %, and the loan to risk ratio for equity lending is pushed from 100 % to 250 %. Furthermore, money from the stock market may flow into other channels like gold and US dollars. In short, cash flows will not support the market for the last three months of the year. Even when Circular 13 was amended and supplemented by Circular 19, which took effect from October 1, 2010 easing contents on lending, the stock market did not react positively.

 

Besides, inflation fears have also fanned investor concerns. According to research by Artex Securities Corporation, although the National Assembly - the highest lawmaking body - expects inflation growth to be capped at 8 % and the Government is trying to hold it at 7 %, the later target is highly unlikely as the consumer price index (CPI) climbed 6.46 % in the first nine months of the year, including 1.31 % in September.

 

Analysts at Artex Securities named local currency devaluation and global commodity price increases as the main causes of inflation. The value of the Vietnamese dong slid 5 % from the beginning of the year. If the depreciation in 2009 was added, the value of the Vietnamese dong has slumped 10 %.

The local currency depreciation will make imported commodities more expensive; thus domestic products will be more competitive and companies will have a wider profit margin. On the other hand, a higher exchange rate of US dollar against the dong will increase input costs; placing more pressure on commodities prices and increasing the possibility of a CPI hike.

 

In addition, consumer prices are also affected by consumer psychology following price rises in basic commodities like electricity, water and petroleum. Recently, the Government has taken many measures to control prices; thus, psychological effects are predicted to moderate. However, these measures can only slow CPI growth, and inflationary concerns will remain a burning issue next year.

Meanwhile, gold and US dollars become more attractive thanks to growing prices. Therefore, according to experts, cash flows into the stock market will remain modest in the near future.

Contrary to the drop in cash flow, the stock supply will continue to increase. This is the biggest concern of the market.

 

Aware of these factors, many investors are sceptical of the uptrend. Every matter has two sides and can be viewed from many angles.

 

According to securities experts, if there is no sudden change, the market will continue to weaken throughout the fourth quarter. This trend may even continue into 2011, 2012 and longer.

 

Nonetheless, other stock analysts believed that the market is accumulating value for a future rebound, although current economic news and corporate earnings are now not strong enough to make a change. Regarding the oversupply of shares, it is undeniable that investors currently have many options.

 

Together with that, seasoned equity offering and bonus share issues will force companies to be more dynamic to ensure good earnings. Eventually, Circular 19 will target better capital safety so the financial market - the blood of the economy - is developing sustainably. These will support the economy and the stock market in the long term.

 

The psychology of stock investors is largely affected by short-term information. However, medium term market trends depend greatly on internal economic factors and corporate earnings. Given a sustained economy and positive corporate performances, the stock market may rebound in the last months of 2010.

 

According to the consulting and research division at Saigon Securities Inc (SSI), the seafood, consumer goods, coal, shipping, port operation and plastic sectors will continue to thrive in the coming time.

According to SSI, coal prices tend to increase towards the end of the year. Coal company profits may be better than expected in 2010. Nevertheless, coal prices applied to large State-owned users will be kept unchanged through 2010.

 

The construction material industry will benefit from accelerating speeds of investment projects in the country in the last months of the year. Oversupply will lead to severe competition among cement producers. On the other hand, selling prices are controlled to tame inflation; hence, very high profit is unlikely among cement producers. Meanwhile, the construction plastic pipe industry is developing robustly due to excessive demand.

Producers of consumer goods will have the biggest sales of the year before and after the New Year. Seasonal factors will boost revenue and profit in the second half.

 

SSI added bulk cargo freighters which will have better revenues and profits because shipping demand is rising and more new ships are being put into operation. Old ship liquidation will continue bringing high profits for shipping firms. However, shipping charges may fluctuate. However, the depreciation of the dong is an advantage for US dollar loans of shipping firms.

 

Year-end is peak season for the seafood industry. The depreciation of the dong will also benefit seafood exporters. However, if the preliminary decision of the US Department of Commerce (DOC) applying anti-dumping tariffs on Vietnamese tra/basa fish is implemented, it will seriously impact many tra/basa catfish exporters because the US is a key market for Vietnamese aquatic exporters. On the other hand, Vietnamese aquatic processors are competing fiercely amid insufficient supply of raw materials.

 

The oil and gas industry is expected to be stable the rest of the year because oil prices are unlikely to fluctuate much. The drilling services sector will continue to have the opportunity to thrive. Investments in oil and gas stocks have relatively low risk ratios.