Economy still looking for its mojo

This indicated that investors were looking for safe havens to avoid risks after media talk of worse macroeconomic news including exchange rate risks, sovereign debts and banks’ bad debts. October also was a net selling month for foreign investors.
In November, the domestic equities markets were mixed for investors.

The consumer price index (CPI) for October was up 0.36 per cent on-month, the lowest monthly rise this year. January-October’s  CPI was up 21.59 per cent on-year. SMEs believes the CPI will stabilise and rise moderately lower than 0.6 per cent per month because food and foodstuff prices have stabilised thanks to surplus supplies.

Local domestic petrol prices have remained unchanged despite a rise in  global prices.
If Vietnam wants to be successful in controlling inflation, the country must see six consecutive months of low inflation. This will help erase people’s fears of high inflationary risks. Therefore, inflation should rise below 0.5-0.6 per cent in the next few months. This expectation could become true with the reasons being as follows. Prolonged high inflation causes consumption to fall.

Meanwhile, falling  property prices and low liquidity have led to buyers turning to savings.
The US stock market technical chart was moving  in a similar mode to that of 2008 and this made  investors fear a deep fall is around the corner. The fall in US stocks makes other assets and commodities follow and the global economy could sink into recession with Vietnam certainly affected.  

Inflation has been the key factor in Vietnam’s stock market over the past few months and the country needs falling commodity shocks to be more successful in controlling inflation. The equities market will then have opportunities to rally once more.

Banks’ bad debts mount up

The State Bank issued Circular No.34 dated October 30, 2011 outlining procedures for withdrawing bank licences and liquidating the assets of financial institutions and banks in Vietnam. This is the legal framework for banking system restructuring as well as for protecting depositors.

Part of the banking restructuring process is that banks have to call back property sector debts from now to the year’s end. We see banks stop disbursing property sector loans to call back loans as soon as possible. This will make property developers sharply lower prices to pay debts.
A 30-50 per cent discount made by some property developers could cause negative ripple effects. Other developers might follow suit and investors would opt to take a wait-and-see approach.
Because of falling property prices, banks will rush to call loans back, causing pressure to lower property prices. This will see prices fall even further.

Property is the main collateral at banks, thus banks’ rising bad debts are understandable. This in turn will put pressure on bank liquidity, forcing banks to borrow more to ensure liquidity and pay debts. However, we see a few positive signals on the inter-bank market recently. Big banks did not join the Ponzi game, but became more defensive.

Circular No.34 indicates that the State Bank is willing to let banks go bankrupt if necessary. This is positive, according to SME Securities’ view, as it will help the market, investors and bankers to re-evaluate risks and control themselves better. The State Bank has also increased transactions via open market operations (OMO) as a last lending resort.

While supporting the idea of reducing the number of banks in Vietnam, we believe the banking system’s problems do not rest with the number of banks or the scale of banks but the low quality of their assets.

Bad debts are negative, but that does not mean a complete loss. The majority of bad debts have collateral which banks often gave lower valuations compared with their market prices. And if there are more  debt trading companies, bank liquidity problems could be solved in the short term.
We believe the State Bank has performed well recently. But, now investors seem to be holding onto their cash, which could be a barrier to money flows into equities.

High gold prices put mounting pressure on VND

A higher domestic gold price has made the USD/VND exchange rate widen further adding to other reasons like falling dong interest rates and a high gap between dollar  lending and borrowing rates. An unstable Vietnam dong and forex rate risks make the stock market less attractive to investors despite low domestic stock valuations. Therefore, there is not enough demand to break resistance levels.

VN-Index chart

After a strong rally in August, the VN-Index has entered throwback mode. Short-term support is at the 400-point level and short-term resistance is 420. Currently, the VN-Index is moving in the 390-481 point range.

HNX-Index chart

During the past five months, the HNX-Index moved under a falling wedge model in the 64.5-78 point range. In the short term, HNX-Index’s support level is at the 67-point level and resistance is 71. Inflation, a frozen property market, and banks’ bad debts are now concerning investors. If these issues are solved, Vietnam’s stock market will have chance to rally again in the long run. Otherwise, in the short term, we would only witness temporary rally waves.

Investors can visit  www.smes.vn for further information.