Fluctuations to be expected ahead of Fed cut and election

It is very likely that the US Federal Reserve could embrace an interest rate cut in September. How would this impact Vietnam’s economy?

Although there isn’t a specific roadmap for implementation, the Fed has signalled that it might embrace a rate cut late in Q3 or in early Q4 of this year after recognising that the inflation rate in June was more favourable than forecast, though it is still far from the targeted level of 2 per cent.

Another factor impacting the US stock market, as well as markets around the world, is the forthcoming US presidential election. Donald Trump’s escape from a recent assassination attempt has brought the election to a new level. Meanwhile, the Democratic Party is pressuring President Joe Biden to withdraw from the race for the White House because of apparent weakness in status.

In the current tense election situation, the Fed still maintains its view that it might reduce interest rates before the November 5 presidential election to stimulate economic growth, while Trump appears to disagree with the Fed’s monetary easing policy.

Nguyen Tri Hieu, senior financial expert

What’s your take on Vietnam’s economic performance in H1 and growth prospects in H2?

In Q2, GDP expanded an estimated 6.93 per cent, and for the first six months, it grew 6.42 per cent on-year.

Vietnam’s total import-export value approximated $368.5 billion in H1 of this year, showing a 15.7 per cent jump on-year, of which export value surpassed $190 billion, up 14.5 per cent due to a rebound in global demand. The trade surplus reached $11.63 billion, contributing to exchange rate stabilisation and replenishing forex reserves.

In H1, Vietnam received $15.2 billion in total committed foreign direct investment (FDI) volume, up 13.1 per cent on-year, while FDI’s disbursed volume reached $10.84 billion, up 8.2 per cent on-year, setting a six-year record in terms of quarterly FDI disbursed volume compared to the same period in the previous year. These inspiring results demonstrate investors’ trust in Vietnam’s growth prospects and the opportunities from the shift in global supply chains to Vietnam.

Additionally, the index of industrial production surged 7.7 per cent on-year due to fair growth in export and local demands. The Manufacturing Purchasing Managers’ Index reached 54.7 points in June 2024, setting a record since May 2022, thanks to improvements in new order intake, healthy exports, and high business confidence.

Leveraging upbeat achievements in H1, Vietnam’s economic outlook will continue to be positive in the second half of the year if the Fed decides to soften interest rates, reducing pressure on the USD-VND exchange rate and inflation, and positively impacting other macro balances.

On the contrary, if the Fed, under pressure from the Republican Party, postpones the interest rate cut, many disadvantages for Vietnam’s economy are forecast, including surging exchange rates and inflation, casting adverse impacts on foreign investment.

Based on these factors, we can expect a continued macroeconomic stability, secured major balances, and enhanced trust from individuals and businesses. Thus, Vietnam’s economic growth might expand by 6.3-6.8 per cent in H2 of this year and range from 6.3-6.5 per cent for the whole year.

What fields of investment could generate higher efficiency in H2 of this year?

Looking at the VNIndex, we can see that the stock market has experienced fair growth in the year to date, despite being affected by foreign investors’ net-selling situation and fluctuations in the global financial market.

I believe the stock market could fare better and become more stable in the rest of 2024 because this is the barometer of the economy. If the economy recovers strongly in the second half of 2024, the stock market will reflect that strong recovery.

Particularly, tickers related to industrial real estate, renewable energy, transportation, and especially the banking sector could be sustainable and more attractive compared to tickers from other sectors. Real estate in urban areas and industrial parks are the two best venture areas from the outset of 2024 and are expected to continue their growth momentum throughout the rest of 2024. This is because industry has been a well-developed sector as foreign investment flow grows strongly. In addition, housing real estate in big cities, although expensive, is still in high demand.

Gold is probably the most cautious investment channel as it is affected by market-based factors and strongly affected by policy factors. The state is particularly keen on the bullion market movement in 2024, which might spark strong adjustments, so investors need to be very cautious.

For the foreign exchange market, the exchange rate has surged by nearly 5 per cent since the beginning of the year. Looking into H2, with fluctuations in the world financial market, especially when the Fed cuts interest rates, the pressure on the exchange rate might soften.

Many surprises may occur regarding the US presidential election and the Fed’s monetary policy. However, the forex market is no longer the lucrative investment channel as it was many years ago.

At this point, the regulatory agency still maintains a very cautious stance towards crypto digital currency, but there has been no move to prohibit it beyond the regulation of not using cryptocurrencies in payments.

In the event of major geopolitical fluctuations and global economic uncertainties, I believe that the role of cryptocurrency will rise and create a lot of pressure on the State Bank of Vietnam. It cannot stand idle when cryptocurrencies play an increasingly important role in Vietnam’s financial market, and perhaps the management agency may need to adopt a regulatory sandbox soon.

We cannot stand on the sidelines because the impacts would be huge for Vietnam’s financial market and the economy in general. Therefore, it is necessary to soon approve and enact regulations on a regulatory sandbox to test its operation, drawing lessons of experience when it is officially put into service.

Recent data adds to Fed confidence on cooling inflation: Powell Federal Reserve Chair Jerome Powell said Monday that recent data boosts the central bank's confidence that inflation is coming down towards its two percent target -- a trend that signals interest rate cuts on the horizon.