Stock Market Lacks Impetus

The Governor of the State Bank of Vietnam (SBV) issued the Decision 8883/NHNN-CSTT to require credit institutions and SBV municipal and provincial branches to implement such regulations on loans with negotiable rates. Accordingly, credit institutions are not allowed to provide loans with negotiable rates to invest in real estate, financial assets (gold, foreign currencies, securities and other financial assets) and operations related to production and business. All those loans with negotiable rates which are not in line with regulations should be terminated before March 31, 2010.

 

The central bank’s decision will negatively affect the market which has already been on the downtrend. Credit growth was reported at 33 per cent in the first 10 months, higher than the full-year target of 30 per cent, intensifying fears of tighter credit policies in the coming time.

 

According to the data reported by the State Bank Governor, securities loans totalled VND6,880 billion by the end of 2008 and VND11,982 billion at the end of September 2009. Although outstanding loans rose, these figures remained much smaller than the allowable amount, which is set at 20 percent of lenders’ chartered capital.

Stock investors feared the credit will slump in the wave of the central bank’s policy. There has no official data on negotiable interest rates but if the rates are lower than 10.5 percent - the ceiling lending rate imposed on the prime rate of 7 per cent, banks will not be willing to lend securities investment. However, the State Bank set the deadline for settling the loans before March 31, 2010. Meanwhile, lending for securities investment usually has short terms and the capital turnover is very quick. Thus, the impact will not cause a shock to the market.

 

Besides, the central bank’s order for stopping providing loans with negotiable rates to invest in real estate and financial assets is not really bad new but good one for the future. When the credit growth exceeded the target set by the State Bank, many feared a large of loans have been injected into property and securities markets, causing overheating growths. Their fears are well-substantiated as the Vietnamese stock market experienced a robust rebound with continuous records in trading value and volume. Many even thought that a considerable amount of interest rate-subsidised loans has been injected into the stock market, prolonging the rally in eight straight months. In November, the market tends to cool down after a long period of hot rally. Speculative capital easily leads to a bubble.

 

Even, without the order of the central bank, commercial banks will restrain securities investment lending in the short term because of capital difficulties and high credit growth. In the first 10 months, the credit growth already reached 33.29 percent while banks are hiking deposit rates to raise funds for the economy as they are not allowed to refuse loans for qualified preferential borrowers.

 

Currently, many securities companies said the market lacked strong momentum for short-term rally. Artex Securities Joint Stock Company commented that the main supporting factor for the VN-Index is the movement of US indices. This only creates sentimental impact, not the motive powers of the market. The downturn reflects fears of economic fracture and instability. Last week, other investment channels like gold and foreign exchange started appearing speculative and drew a lot of cash from the stock market. Higher exchange rate will lead to higher prices of imported goods, intensifying inflationary pressures.

 

In its latest Vietnam Monitor Report on economy, financial and stock market, HSBC Bank said Vietnam’s stock market is less attractive than other regional markets.

HSBC pointed out that after reaching the peak of 600 points in late October 2009, the VN-Index decreased by 8 percent by November 9.

 

The VN-Index lost more points than other Asian markets from the beginning of the fourth quarter of the year to November 9. HSBC said since then Vietnam has remained the second worst market in Asia in the fourth quarter.

 

When the stock market advanced, investors, especially foreigners, sold to take the margin. Within the first five days of November, foreign investors had a net sale of US$15 million, a level which much higher than the US$1 million level seen in October. The sale of foreign investors has led to the decrease in foreign ownership ratio in Vietnam’s stocks to 16 percent from 21 percent in July.

 

At the interpellation session at the National Assembly, State Bank Governor Nguyen Van Giau informed that up to US$500 million of foreign indirect investment (FII) has been drawn out of Vietnam since the start of 2009. In 2008, the figure was US$578 million.

 

HSBC affirmed that Vietnam’s stocks are now more expensive than stocks in other regional markets. The current P/E (price to earnings ratio) on the Ho Chi Minh Stock Exchange (HOSE) is 23.8. If suggesting that the EPS (earnings per share) of the next 12 months is 20 percent, then the P/E of the next 12 months would be 19.1, while the P/E of 2010 would be 15. These P/Es are well higher than other regional markets, such as Thailand (P/E of the next 12 months would be 12), China (14.7), Indonesia (14.6) and the Philippines (15).