Looking for guiding market paths

Despite positive technical supportive signals, investors remained on the sidelines and market liquidity decreased. December’s market moved in a similar fashion to late 2008 and early 2009 when the market fell slowly but over a long period.

Vietnam’s macroeconomy is still facing challenges including stubbornly high inflation, high interest rates and bank liquidity difficulties which mean foreign investors are remaining negative in their market outlook.  

Inflation controls too early to be successful

In December, the consumer price index (CPI) rose 0.53 per cent month-on-month, a relatively high against the previous two months’ indicators. December’s inflation was not affected by recent hikes in the prices of electricity, aviation and gas. For all of 2011, the CPI rose 18.13 per cent against late 2010. Although inflation growth has cooled to around 0.5-0.6 per cent a month in recent times, it is too early to be positive about inflation control.

The government is targeting inflation under 10 per cent for 2012, based on further tightening monetary policies like that seen in 2011 after calculating gross domestic growth (GDP), money supply and credit. We think that the government can hit this inflation target if global commodities prices fall sharply, meaning that our inflation fight will heavily depend on global factors. In the short-term, the inflationary outlook is unclear.

Electricity prices rose 5 per cent recently compared to a proposed 11.7 per cent hike but this hike was not enough to cover  Electricity of Vietnam’s (EVN) losses. Therefore, further hikes will take place in 2012. In the past, when inflation was cooling, electricity producers and other producers tended to take the opportunity to raise prices, meaning the prices of commodities were unlikely to fall, causing high inflationary expectations.

Vietnam’s economy is partly dollarised which presents the government with some problems. Given an inflexible exchange rate policy, interest rate cuts will not help increasing production but instead fuel speculative money flows to such investment channels like property, hard currencies, gold and equities. If the central bank wants to set the USD/VND exchange rate, interest rates must be altered accordingly.

An evidence for this argument is when the State Bank lowered interest rates in September, the exchange rate immediately rose and bank money flew to gold for bargains. At the same time, interest rates stayed high for a year, but GDP still grew 5.9 per cent in 2011 [credit growth was only 12 per cent]. In the previous year, however, GDP saw the same growth but credit growth soared 30 per cent.   

Global crude oil prices are back up at $100 per barrel and this is likely to rise further in early 2012. If global crude oil is at around $120 a barrel and global commodity prices soar back, it will negatively impact on Vietnam’s economy.  With inflation still a concern, investors cannot hope for a bullish market.

Positive indicators

The government aims to reduce state investment to 33.5 per cent of GDP and the state budget deficit to below 4.8 per cent in 2012, from 38.9 and 4.9 per cent in 2011, respectively. It will mobilise VND50-60 trillion ($2.4-2.9 billion) from government bonds this year, targeting money supply growth of 15-16 per cent growth, and credit growth of 15-16 per cent.

If the gold price falls to $1,100 an ounce from current $1,600, exchange rate risks will lower.
Exports will soar in the first quarter of this year thanks to rice shipments, which will reduce the risk of the VND getting weaker.

Commercial banks will focus on safe investments rather than boosting credit growth. The State Bank is more experienced in running monetary markets.

Spending pressures because of the need for infrastructure development and possible stimulus packages to rescue banks could mean the state budget deficit does not come down as much as expected.

High inflation is still expected

The government aims to lower interest rates, based on supply and demand, inflation expectations and fiscal and monetary policies in 2012. This is positive signal, but challenges remain. When investor confidence is eroded, the equities markets can only rally once signs of lower rates become clearer.  

Technical analysis

The VN-Index rose from May to November 2011 but a downtrend arrived in November 11, 2011 and two “pull back” efforts later failed to bring the VN-Index back up. This saw the index fall over the last two months and this was a negative signal. The VN-Index could move to the 300-point level in the medium run and the 365-point level would be resistance one.   

HNX-Index

HNX-Index moved in the falling wedge pattern from May to November, 2011. According to this model, the medium-term target for the HNX-Index is the 50-point level. At this time, the memories of a long downtrend in late 2010 continue to dominate investors’ thinking.

Conclusion

Macroeconomic fundamentals will not change quickly and may even worsen if inflation risks return in early 2012. Due to future uncertainties, it is difficult to affirm if we are out of recession or entering a more serious economic depression. Though the government determined to stabilise the macroeconomy with the introduction of Resolution 11, the results were not remarkable, particularly in terms of state enterprise reform.

For investors, holding onto cash is not a bad choice right now. For speculators, technical charts will be key in defending against risks.

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