Market’s death walk

The macroeconomy has not improved as expected with inflation spiking and equity markets plunging the deepest of 14 eastern Asian economies. Meanwhile, exchange rate risks remain due to unstable foreign reserves.

In August, the domestic equity markets will be a mixed bag for investors.

The consumer price index (CPI) soared 1.17 per cent on-month in July as food and foodstuffs, particularly pork, rose sharply after stabilising during the two previous months. Therefore, the CPI was up 14.61 per cent in the year to date and 22.16 per cent on-year. There were no key commodity price shocks over the past three months, but Vietnam’s inflation remains high, indicating that high inflation expectations are apparent. SME Securities expects a high inflation rate in August as pork prices remain high, while soaring gold prices and recent Nock-ten tropical storm will put commodity prices under pressure.

The exchange rate stabilised in July, but signs of instability remain. Commercial banks are willing to pay a higher than ceiling deposit rate limit as USD lending rose sharply, but they lack USD deposits. The difference between USD deposits and lending reached VND85 trillion ($4.1 billion) in the first half of this year, compared to VND41 trillion ($2 billion) for the whole of 2010. This will be risky for liquidity and there might be further VND weakening when debt payment time is near.

Interest rates depend on inflation expectations and the money supply. Currently, inflation expectations remain high with a 18-20 per cent on-year rise for 2011 while capital demand is greater than supply. Therefore, interest rates are unlikely to fall in the short-term.

The impossible trinity, which suggests it is impossible to have all three of the following at the same time: a fixed exchange rate, free capital movement (absence of capital controls) and an independent monetary policy, is a tough puzzle for the Vietnamese government and State Bank. There are louder calls for loosening the monetary policy to support growth, but macroeconomic uncertainties remain.

New cabinet to offer new monetary policy

Normally there are new economic policies when new government leaders are appointed. With the newly appointed State Bank governor, SME Securities expects adjustments to the monetary policy would take place in August. Current tightening fiscal and monetary policies will hold on and a higher compulsory reserve ratio is likely as the recent open market operation (OMO) tool was not as effective as expected. However, any change will be likely in late August.

A bear market cycle

To calculate how long a bear market will last, SME Securities looked into previous United States bear markets for reference to guess the Vietnamese market’s bottom. Statistics show that the shortest US bear market lasted 2.9 months and the longest 34.2 months. For Vietnam, the bear market has lasted more than 21 months. Historically, the US had four bear markets lasting over 20 months in which the longest was in the Great Depression during 1929-1933. If compared, Vietnam’s stock market is expected to bottom out next month.

The VN-Index is on 61.8 per cent Fibonacci support level, equivalent to 405 points. The current downtrend seems oversold. The target buying price is around the VN-Index formed on May 26, 2011.

HNX-Index technical view

The HNX-Index is moving downward with a two reversal bottom model. In this model, the trading volume is normally very low when the market tests the second bottom, which is normally 5 per cent lower than the first bottom and the volume soars when the market returns to the first bottom. Therefore, the target bottom for the HNX-Index is around 62-66 points.

Investors’ poor confidence

Foreign investors in Vietnam consider the domestic market an attractive opportunity, but their available cash is limited while new foreign money inflows are small on concerns over macro risks and market transparency.

Domestic fund managers have negative outlooks on the Vietnamese stock market. Some funds have to liquidate to help mother companies in the property sector. Therefore, available cash remains tight for domestic funds.

The majority of domestic retail investors have negative eyes on the market. Some have left the market. A “wait and see” attitude is common for numerous “big-boy” investors.

SME Securities is not too negative on the market’s outlook. But, big positive market moves are unlikely as macro indicators will be negative in the short-run. Technically, the market is likely to rally short-term, but this rally is a bear-trap and needs further confirmation via trading volumes.

The stock market seems to be ahead of economic trends by six months. However, sometimes the market goes the opposite way. Before dawn, there is always dark but no analysts can forecast when the dark ends. Price and trading volumes will answer.