Stock Market 2010: Cash Flows Ebb

 

Although stock values moved in a wide spread, VN-Index and HNX-Index - the two main gauges of the Vietnamese equity market - did not change dramatically. The VN-Index advanced in the nearly first half of 2010 but it mainly lied in the range-bound of 450 - 500 points. Two steep losing runs in the third quarter sank the HNX-Index to about 97 points while the VN-Index nosedived to the support of 420 points twice.

 

Notwithstanding a rapid recovery in the first half of December, the growth was not as high as other performers on the globe. The daily traded volume of 40 million shares on average was not low relative to the daily average in 2009. Foreigners played had great impact on market value on both HOSE and HNX with net buying value of more than over VND10,000 billion as of September.

 

Monetary fluctuations were a drag on the stock market. The US dollar continuously depreciated against most currencies but it strongly appreciated against the Vietnamese dong; the differential of USD/VND exchange rate on official and free markets hovered at 10 percent; escalating inflation and soaring interest rates sank the Vietnam's stock market in the third quarter. On December 20, Ho Chi Minh City reported the CPI growth at 9.58 percent in 2010, indicating that the country’s consumer price might climb at a two-digit rate. This woe could sink market indices in the last days of the year.

 

The soaring supply of shares has also caused increased pressures in the midst of limited demand. According to statistics, secondary equity offering (shares) by listed companies absorbed nearly VND35 trillion (at par value) in the year to the end of October 2010. Licensed initial public offerings also valued at VND60,000 billion in the reporting period. The two main bourses admitted some 150 new listings in 2010, an increase of 25 percent from a year earlier, with a combined market capitalisation of VND90,000 billion. These values did not count initial public offerings of State-owned enterprises and divestiture value on the stock market.

 

Unlike in 2009, blue-chips did not create tidal waves but penny stocks “kept the fire going” for the market. Values of many small-cap stocks doubled or trebled in a very short period of time. However, with small market capitalisation, penny stocks are the easiest to be manipulated, leading to the distortion of the market development and loss of investor confidence. The State Securities Commission of Vietnam (SSC) took disciplinary actions against individuals and institutions in connection with the act of ‘rigging’ the market, such as manipulating prices, falsifying information for illegitimate personal interests. AAA, SQC, AMV and DVD were typical targets of manipulation in 2010.

 

In addition, securities companies had excessive preferences for big investors, creating inequitable treatments amongst investors, and losers were always individual investors with limited financial capacity. Besides, monitoring mechanisms and information disclosure regulations are not really effective, not strong enough to put an end market manipulation.

 

According to experts, the Vietnamese stock market will be better supported in 2011. New services will be added, including margin trading, multiple trading accounts for a single investor, and T+2 clearing payment regime.

 

Besides, the stock market always depends on business performances of listed companies. According to statistics, most listed companies on both HOSE and HNX exchanges had better business results in 2010 and revenues and profits increased from a year earlier. Revenues of HOSE-listed companies rose 21.9 percent and net profit expanded 21.3 percent while the values on HNX were 32.1 percent and 32.4 percent, respectively. These importantly support new investment decisions on the stock market.

 

As lending rates remain high, many companies will choose to raise funds through the stock market. Many regulations will be adopted to improve the market. These supports will be an opportunity for investors and market participants to make gains.

Many investors did not have satisfactory investments in 2010 because of many different reasons. The primary cause was ineffective macroeconomic policies of Vietnam, which resulted to high inflation, large trade gap and eroding public confidence. Stock split and dilution were also important factors for the sharp slump of the market.

 

Therefore, investors poured more money into gold and US dollar rather than stock market.

However, in general, the Vietnamese stock market is still very attractive as share prices remain cheap, listed companies are industry leaders and their business results are very optimistic.

 

Visually speaking, Vietnam's stock market is like a wall with a solid foundation but it lacks investor confidence. The market now has good stocks at reasonable prices but it needs a prop from Government’s good economic policies. If Vietnam does well this in 2011, the market will be very attractive. Stable macroeconomic policies will increase cash inflows to the stock market. In my opinion, the market benchmark VN-Index will finish 2011 at 600 points.

The stock market in 2010 rationally reflected the Vietnamese economy. The macro economy was pessimistic in 2010, led by balance of payments, national debt and high inflation. These woes worsened the investor sentiment.

 

If you only looked at VN-Index, you would not have an accurate assessment of the market performances. If you looked carefully, you would find out that when the VN-Index closed at 420 points, actual share prices were equivalent to the VN-Index value of less than 400 points. The benchmark was supported by heavyweight stocks. When the market liquidity was very low, these stocks still had large trading volume, totalling nearly 10 million shares per day. To absorb such a large volume of shares for a long time, the cash flow had to be very big. If you thought logically, you would find out that deals were made by institutional or big investors.

 

In 2011, the Vietnamese stock market may rebound in the second half because inflation problems will be completely resolved, corporate earnings will be better and good dividend policies will attract money into the market.

In addition to general macroeconomic difficulties, non-transparent information and stock price manipulation continued to be emerging problems on the Vietnamese stock market. The very lack of transparent information, herd mentality-driven investment, excessive focus on penny stocks and overlook of fundamentals caused an unsustained development of the Vietnamese stock market.

 

The new listings affected the VN-Index as the supply outstripped the demand. With sideway movements and gradual declines as a primary note, money flows was attracted by other more attractive channels like gold, real estate and foreign currency. As a result, the liquidity of the market continuously drained.

These negative factors caused direct impact on investor sentiment and dragged on the market.

 

Stepping into 2011, shares will not increase and decrease in the same way but there will be sector classification due to different supports of capital flows. In general, the market is expected to be expanded.

We expect foreign capital flows remain strong in 2011 and this may be a good support for the development of the domestic stock market. Macroeconomic stabilisation objectives pursued by the Government will attract cash flows from foreign investors. In approaching a new investment environment, the stability will be the top concern of institutional investors, not fast-growing but risky ones. Besides, Vietnam will open its door wide for wholly foreign-owned financial institutions from 2012 and it may see a landing of foreign financial institutions into Vietnam next year. Coming with them is a larger amount of money for the stock market; thus, this is a very promising point next year.

 

Given more stable macro situations, stronger cash inflows and improving corporate earnings, the stock market may climb 20-25 percent.

It was clear that the volatility of the Vietnamese stock market in 2010 was wide in comparison with the rest of the world: HNX-Index, 1.9 times; VN-Index, 1.3 times; Dow Jones, 1.19 times and Nikkei 225, 1.27 times. Comparing the recovery from the market high in the history, the degree of recovery of the Vietnamese stock market is very low: VN-Index is 41.2 percent and HNX-Index is 26 percent while Dow Jones is 82 percent and Nikkei 225 is 64.4 percent.

 

Apart from internal difficulties, the market was also dragged by external factors in different points of time, particularly European debt crisis or debts incurred by Dubai World Group, United Emirates of Arab.

 

I think the difficulty is not over on the stock market in 2011 as macro matters like inflation, exchange rate, public debt and other woes will not solved basically and they will take more time. Improving the quality of economic growth on the basis of reducing capital-weighted dependence is the upcoming policymaking trend, indicating that a high credit growth in 2011 is not of high probability.

 

On the other hand, fiscal policies in 2011 recently passed by the lawmaking National Assembly favoured a tightening approach to reduce budget deficit and public debt. Besides, companies will not be able to bear current high interest rates if this exists for a long time. As a result, corporate earnings will be dented in 2011, specially companies using big outside money. It takes time to resolve these matters and the market will be in best form when interest rate, exchange rate and inflation problems are healed. Hopefully, the the market will begin a new growth cycle from the second half of 2011.