“Stock Market Will Be Lacklustre at Least Next Two Months”

Looking at what has happened on the market, I see that the stock market is undergoing a rapid-fire flow of bad information. What investors can see is a worse outlook of the market. The rise in prices of petroleum, coal, electricity and imported goods is spiralling up the consumer price index. CPI growth accelerated to 3.87 percent in the first two months, adding more difficulties to the Government’s task of curbing inflation.

 

The Government has reaffirmed its determination to rein in inflation and tighten both monetary and fiscal policies. Tight monetary policy will make interest rates at commercial banks more difficult to fall down in the short term.

 

Input costs rise in the wake of high inflation and interest rate while selling prices are unlikely to be raised at the time of credit tightening and business performances of companies will be affected as a result. These issues entailed a nosedived slump of the stock market in the past two weeks.

 

Positively, investors saw attractive values when the VN-Index and the HNX-Index dropped to 450 points and 90 points, respectively. The market will likely accumulate its value at these supporting levels. Maybe, the market will be lacklustre in the next two months and a rising trend will occur in June.

 

Since the start of 2011, the market has not witnessed any significant wave formulated by business results. Many businesses reported their profits climbed 60 percent in 2010 but their shares advanced only one session (limited at 5 percent on HOSE and 7 percent on HNX). This suggests that corporate earnings have insignificant effects.

 

The Government’s recent policies will cause disruptions to business operations of companies in the short term. They are pressurised by rising interest rates, exchange rates and prices of input materials and energy. In my opinion, there are many sources of influence on stock market performances, such as listing and seasoned equity offering. Besides, lower share price will accelerate M&A activities.

 

Since late 2010, after reviewing the economic situation, the Government iterated its top target was macroeconomic stability. And, monetary tightening and inflation curbing are the specific steps to achieve macroeconomic stability. Recently, the Government’s Resolution 11 reconfirmed the limit of credit growth for non-production areas, particularly securities and real estate sectors. In addition, such policies as ebbing public investment and raising interest rates in a bid to curtail inflation will raise more difficulties for business activities of companies.

 

This policy will give rise to a reduction in cash flows for the stock market. Many stocks have dropped 25 - 30 percent from their short-term peaks as negative macroeconomic effects loomed. Credit tightening will of course cause adverse effects on the stock market but investors do not seem surprised at this.

 

However, bank credit flows for the stock market is modest and account for a small proportion of total bank loans. Moreover, gold speculation and dollar hoarding indicate that the public is holding a lot of unemployed capital. Hence, cash will flow into the stock market when share prices are more attractive and macroeconomic outlooks are brighter.

 

Recent trading results of foreign investors indicated that they have shifted their portfolios with more interests for medium-priced blue-chips. The sharp drop in share prices on the Hanoi bourse last year has caught the attention of foreign investors.

 

Recent net selling is merely resulted from purchasing reduction and portfolio restructuring. The devaluation of the local currency against the US dollar has increased the value of new investment funds and stock prices are more attractive; foreign cash flows into the Vietnamese stock market are expected to accelerate when macro factors are better.

 

The Government’s anti-inflation policies will have effect after at least two months. Therefore, we forecast the market may not drop sharply but it may not rebound immediately. Indices will fluctuate within narrower range-bound and liquidity will be weak. In our opinion, investors should pick up good stocks for medium and long term investments during this period. With short-term perspective, investors should maintain a reasonable and safe ratio of cash to shares. Stocks of priority must have good fundamentals and medium prices. “Treading water” investors should not return to the market.