May Stock Market: Penny Stocks in Focus?

In April 2010, economic data supported the stock market, particularly lower lending interest rate, stable exchange rate and controlled consumer price index (CPI).

 

The VN-Index, the key gauge of the Vietnamese stock market, closed at 542.37 points in the last day of April, a gain of 43.13 points, or 8.64 percent, from March. The measure slid only four days in 20 in April, outperforming other months of the year.

 

The HNX-Index, the gauge of the Hanoi bourse, was even more impressive. The measure HNX-Index settled at 179.69 points, a rise of 19.14 points, or 11.92 percent, from March. Specially, the monthly trading volume came to 897 million shares, up 37 percent month on month. Cash flows were channelled into the northern Hanoi bourse, particularly small and medium stocks. In several outperforming days, the trading volume on HNX approximated that on the Hochiminh Stock Exchange (HOSE).

 

As of April 29, foreign investors bought net of Vietnamese listed shares for 22 consecutive sessions on both exchanges, HNX and HOSE. In April, they purchased net of more than VND2,265 billion on HOSE and VND166.7 billion on HNX - highest monthly figures in recent years. Foreign investors mainly invested in blue-chips like HAG, SJS, FPT, PPC, BVH and CAN.

 

We find out that foreign investors increased their portfolios when the VN-Index approached psychological resistances of 500, 520 and 530 points.

 

We learn that securities companies did not use much of financial leverages in April, a reason for not seeing a sell-off when the VN-Index dropped.

 

However, financial leverages started to be use more from the third week of April when speculative money flows increased on HNX, resulting in consecutive gains. Many stocks advanced 50 percent, 70 percent and even 100 percent. This caused unexpected booms in trading value on both exchanges although we do not exclude the reason of new investors.

 

We believe that the good performance of the stock market in April was supported by improving domestic macroeconomic data and positive global stock advances.

 

First of all, interest rate caps on both deposits and loans were freed. This was a significant change in the month because the Government was determined to take bring down the interest rates to support economic growth. On April 9, many commercial banks pledged to keep the lending rate at 15 percent per year or lower. Then, they announced a lending rate cap of 11.5 percent per annum.

 

Secondly, from the beginning in of April, the Government adopted measures to curb inflation like setting up price stabilising funds for key commodities like electricity, coal and gasoline, controlling and reducing sugar and fertiliser prices, and trimming import duties on petroleum by 3-5 percent. As a result, the consumer price index rose only 0.14 percent in April, the lowest monthly rate since March 2009.

 

Thirdly, the foreign exchange market continued to be stable in April. This was the second consecutive month the USD/VND exchange rate was kept stable. Arguably, the State Bank of Vietnam managed to whack gold speculators and regulate domestic gold prices at reasonable rates.

 

Fourthly, the reduction of interest rate on loans in foreign currencies (to 3-5 percent per annum on average) attracted more companies to borrow foreign currencies instead of the local currency (with on average interest rate of 16-18 percent). This measure also helped reduce strains on exchange rate. As of April 29, 2010, the USD/VND exchange rate on the free market was closed to commercial banks’ quotation of 18,900.

 

Fifthly, the Vietnamese stock market was also spurred by global stock uptrend, with the Dow Jones Industrial Average exceeding the 11,000-point threshold for the first time since September 2008.

In April, investors witnessed the outperformance of small and medium-cap stocks which characteristically had individual chartered capital of VND200-300 billion or less and floated 20-30 million shares or fewer. Many small and medium listed companies reported good business results and had lower-than-market-average P/E. However, small and medium stocks were ignored by investors because of their low liquidity.

Additionally, in April, blue-chips failed to lead the uptrend as cash inflows were not strong enough, with a daily trading value of around VND2,000 billion. Hence, the VN-Index moved in the range from 515 points to 523 points for a long time. Despite little changes in the market gauges, many medium and small stocks on HOSE and HNX soared, with improved liquidity.

 

According to data from market operators, 68 stocks listed on HNX and 19 issues on HOSE advanced more than 30 percent in April.

 

Some 90 percent of 87 stocks climbing over 30 percent in April were small stocks. This suggested that investment strategies of investors were flexibly changed when cash flows were not strongly channelled into the stock market.

 

This was also the reason why the speculative cash was flowed into HNX where there were many attractive small and medium stocks. In April, trading value on HNX sometimes roughly equalled or even exceeded HOSE value.

 

Reviewing outperforming small and medium stocks in April, we find out that they were supported by positive information like attractive bonus share issue or better-than-expected first-quarter profit, etc. Essentially, these shares usually surged when the supporting information had not been officially announced.

 

Ten best performers in April 2010 included PVC, CVT, HJS, PVE, TNA, HHC, LTC, DCS, SRA and SDH, with gains ranging from 94.3 percent to 140.9 percent.

We expect that the stock market will be vibrant in May 2010 as cash flows will make inroads. Foreign investors will continue to buy net on both exchanges.

 

Positive information like lower CPI growth, lower interest rates and higher credit growth will prop up the market in May. Trading volume on HNX will continue to be maintained at high level because of speculative cash flows.

 

Small and medium stocks with good fundamentals will leap if they have not increased much. They may even jump higher on the back of attractive profit reports or bonus share issue.

 

Investors continued to lose the appetite for many diluted large-cap stocks. However, technical analysis suggests these stocks are at their trough, a good option for medium and long-term investments.

The uptrend in May will continue, but with a slower pace. We believe May is an important accumulative period of heavyweight stocks for a leap anticipated in June.

 

Financial and banking shares are believed to gradually regain their market stances from the second half of May when the market will see more good information from the banking sector. Technical indicators show that financial and bank shares have accumulated for quite a long time and have hovered at their troughs for a long time. They will leap, but not as high as small-cap stocks, if cash flows are strong enough in addition to supporting information.

 

Our cash flow analysis shows that the market trading value need to reach VND30 trillion in 10 consecutive trading sessions to put blue-chips on the rally path. Under the current context, this is unlikely to happen in May.

 

However, we still believe that the VN-Index will exceed the resistances of 550-560 points in May. The weekly graph shows that the VN-Index still clings to a medium and long-term rising trend line, with higher recent bottoms (the deepest bottom is the week ending December 18, 2009). Price lines are lying above the SMA (50) line and SMA (100) line.

 

With our optimistic views on medium and long term prospects, we believe that investors will continue to buy and hold good stocks when the market experiences corrections. Investors should keep eyes on medium-cap stocks with good earnings and bonus share plan.

 

Besides, investors can invest in small and medium-sized stocks for quick profit, especially good ones with little rallies in April. We anticipate that many medium and small stocks will continue to grow in May.