Nervous glances at market

By the end of September, a significant portion of cash flows had stayed outside the market awaiting clearer opportunities.

Many investors have jumped into the gold market in search of elusive profits

Although many investors expect to see the market pick-up in the last quarter, we are cautious about October due to a number of reasons. The first reason is State Bank adjustments to Circular 13 were much less than investors’ expectations  and we do not foresee any surprises in monetary policy changes in the short- term.

The third quarter’s gross domestic product (GDP) growth was positive at 7.16 per cent in parallel with the rise in inflation during September (1.13 per cent), which raised questions about the quality of real economic growth in 2010.

Another reason is the significant proportion of cash flows from the government still headed into national projects such as the Dung Quat oil refinery or addressing Vinashin’s woes. Private enterprises still cannot access abundant sources of funds at lower costs. Also, the third quarter’s corporate earnings do not signal a positive spin on the market and companies have tended to announce estimates near closing dates.

In such gloomy market conditions, short-term traders will likely seek opportunities from ‘surprises’ or ‘rumours’. Companies that deliver outstanding financial results can still outperform the market generally.

The market in October is likely to be affected by the following factors:

We observed in September that many investors had prepared to cash-in on the market once Circular 13 was significantly modified. However, the fact that the market only picked-up slightly after the announcements indicates that such modifications did not meet investors’ expectations. Looking back, what changes were local investors’ interest?

 - The possibilities of using more indefinite deposits for lending

 - The State Bank’s green light to allow banks to use a higher percentage of inter-bank funds and from the open market for lending

- The potential downward adjustments of the risk ratios of real estate and securities loans, allowing banks to expand lending activities in these areas.

The final modifications only fulfill the (i) expectations though (ii) and (iii) were much more attended to. Investors believed that if (ii) had come true, monetary policies could have opened a new chapter for the market’s  pick-up. Inversely, we are not optimistic about the new cash flows into the market upon the effectiveness of the circular.

During a long period between May and August, the State Bank took no concrete steps though inflation was kept low. Hence, we are suspicious about any stronger actions from the State Bank in the fourth quarter, the most inflation-sensitive period, especially when the September consumer price index (CPI) hiked at 1.13 per cent. To date, taking into account inflation, Vietnam’s real economic growth is only slightly positive. With the typical cycle in the fourth quarter, it is less likely that the State Bank will bump abundant cash into the system.

‘New’ cash flows into the financial market for the remainder of the year might just be another reflection of the first quarter. However, at the same time, we do not underestimate the importance and strength of the ‘old’ and current cash flows which have been standing outside the market for a while and those from the non-bank institutions. If there are positive signals of recoveries or the third quarter’s earnings are surprising, those sources of funds can support the market trend.

Further negative impacts from soaring gold prices and continuing high interest rates?

A series of events such as the minimal changes in the central bank’s Circular 13 on safety ratios, the base cash rate (at 8 per cent), or the pick in inflation in September, the door for lowering deposit and lending rates seems to be closed. It also means that another expectation of investors gradually fades out in 2010. The implication is that companies that rely heavily on bank loans will find it hard to grow from the basis of 2009 when the macro economy is still in difficulty and funding sources are limited.

Also during September when the stock market was quiet and gold prices were dancing, many investors sought opportunities from ‘surfing’ the gold market to utilise the spare cash. However, with the current soar in gold prices, investors might soon sell down their positions to realise profits before any adjustments.

If gold prices stay high in October, a portion of the cash flows will get back to the stock market to approach opportunities when companies announce third quarter earnings. This is one of the important reasons in our view of improved liquidity in October.

Opportunities from third quarter earnings announcements?

Although the third quarter’s GDP growth is still in line with the target, we do not foresee surprises in corporate earnings in the third quarter due to a number of reasons.

Enterprises are still operating under a tightening monetary period.

The GDP growth does not reflect the difficulties of most companies in seeking funds at lower costs. Compared to the same period in 2009, credit growth might just halve. Therefore, it is too optimistic to believe in any meaningful positive earnings growth.

The stock market was gloomy during most of the quarter with low levels of liquidity. Companies heavily involved in financial investments such as banks, securities firms, insurance companies will experience the worst.

The coldness of the real estate market in the south and the slow-down in the north are also challenges for real estate firms, especially ones which plan to generate income from sales in the second half of the year. Real estate companies which sold the projects earlier but not yet recorded revenues, however, could potentially remain unaffected.

During the period of time when earnings are positive, companies tend to announce the estimates very early, even before the quarters finish. However, by September 30, 2010, the market was still very quiet.

Under such  gloomy market conditions, stock prices of many firms have slid significantly.

The good earnings announcements of a few companies might not contribute to the changes in the market trend. Therefore, many might just choose the option to push all the revenues and profits to the last quarter instead. We believe this is a great opportunity for medium and long-term investors who appreciate fundamental values.

In the third quarter, some sectors including consumer retail, consumer services, publishing, natural rubber and pharmaceuticals might perform better than others.

Market is staying at a short-term demand-supply balance?

Given low expectations of any surprises in October, we have the following views based on our fundamental analysis:

The 440-460 VN-Index range might continue to hold well when most of the ‘hopes’ of investors were resolved in September. Lower than 440 points, buyers will step in to capture ‘cheap’ stocks. On the other hand, the 460 level is considered just good enough to take profits under the current difficult market environment.

Liquidity could be improved compared to September although the third quarter financial statements are expected to be colourful.

Portfolio restructuring and sector allocation tend to be the strongest in the month of quarterly corporate announcements. However, liquidity will not surprise much unless the range 440-460 is clearly broken.