September to provide anticipated answers

Under pressure investors may slowly see some light at the end of the tunnel

Vietnam’s stock market saw an upturn in August. There was increasing liquidity with an average of around 30 million shares traded daily basis. With improving liquidity, stock prices also rose sharply from their August 10 low with some rallying as much as 50-100 per cent. The market index rallied by only around 15 per cent, indicating that Vietnamese stock markets remain attractive investor destinations.

A question everyone wants answered is can Vietnam control inflation?

The answer is yes. As we have said, Vietnam is in the psychological inflation mode and needs sharply falling commodities prices shocks to put an end to this. Luckily, global commodities prices, and particularly that of crude oil, have been falling sharply over the past months.

In September, it is more likely that the consumer price index (CPI) will see growth below 1 per cent a month thanks to lower prices for several key commodities and foods like pork and rice. Retail oil and gas prices have also been cut by VND500 a litre.

Interest rates to cool down in September?

For the first time this year we have changed to lower lending rates. We now have chance to bring the rates down to 17-19 per cent, per year as the central bank wished.

Firstly, inflation is believed have peaked and shows signs of cooling – a good indicator for lower interest rates.

Secondly, the issuance of Circular 22 by State Bank of Vietnam (SBV) outlining commercial banks with strong liquidity will cap deposit rates at 14 per cent and lend at reasonable rate. SBV will refinance 10 smaller banks at a low rate to boost liquidity.

SBV will also strictly punish banks that violate the 20 per cent credit growth limit for 2011 and those mobilising capital at higher than the 14 per cent, rate cap. By making these moves, SBV is believed to be ready to do anything to clean up the banking system.

Last but not least, banks’ capital mobilisation by August 18, 2011 was on the rise again, estimated to be up 3.04 per cent in August against July, with Vietnamese dong deposit up 3.32 per cent and foreign currency deposit up 1.81 per cent.

Money supply and inflation are key conditions for the lowering of interest rates. Currently these conditions are in sight and some key commercial banks like BIDV, Vietcombank (VCB), Saigon and Hanoi Bank (SHB) have reduced lending rates.

Forex rate risk a tough question

The movement of the forex rate is difficult to predict. Credit in the economy is still focused on the growth of foreign currencies. Vietnam dong denominated credit in the year ended August 19 fell 1.05 per cent on-month, while foreign currency credit was up 0.82 per cent. This will cause pressures when debt payments are due.

The lower dong deposit rates will narrow the rate difference between dong and foreign currencies, making local people hold onto hard currency, rather than Vietnamese dong.

The sharp rise in gold prices could make speculators to jump to gold and pressures the exchange rate.

The State Bank also introduced some strong measures to prevent devaluation expectations. These include adjusting the foreign currency risk ratio, forcing banks to hike compulsory reserves of foreign currencies by an additional 1 per cent point, tightening the scope of clients entitled to borrowing hard currencies, revealing it will devalue the Vietnamese dong [if necessary] by a maximum of an additional 1 per cent over the rest of 2011, and selling billions of US dollars to stabilise the market.

With the current movements and with a huge expected surplus of hard currencies from the balance of payments this year, we can hope for a stable forex rate.

Has Vietnam’s market bottomed out?

It is not easy to draw conclusions here. For most investors, the market’s bottom is realised when the market crosses over the bottom for a long period of time. In this report, we highlight some indicators that we believe show the market has indeed bottomed out.

According to the Dow Theory, the market’s consolidating area has the following hallmarks:

The downward trend is weakening, but large selling orders remain as investors are unsure of the future and need cash for their own purposes. All stocks then fall to very low level valuations. Stock valuations are very low now on Vietnam’s stock markets with an increasing number of stock prices below face value.

There have been few rallies for brokerages to dump mortgaged stocks. Market liquidity is low, centred on some blue-chips like REE, ITA, KLS and PVF, while most others saw no transactions. In the bear market of June to August this year, the market fell slowly.

Bad news dominates the market. High inflation, soaring pubic debt, high interest rates, unstable forex rates, bankruptcy, soaring banking bad debt and a property market bubble were daily news stories.

Market liquidity was very low. The trading volume in the past few months was at its lowest level in two to three years.

According to behavioural theory, uneducated investors usually make mistakes at key reversal points. Therefore, going against the majority view that selling is good and stocks are expensive could bring surprising benefits to investors.

In fact inflation and interest rates in Vietnam are showing signs of cooling down. Additionally, the bottom zone normally results in several changes in policies. The market rally was based on such news and a change in confidence.

For a technical analysis, any change in prices when it breaks a price line model on charts will be important note. Immediately crowds will be informed about such changes and this could signal a new trend. The HNX-Index, which broke the medium resistance line set up in March, is moving on the back of that theory.

Thus, Vietnam’s stock markets seem ready for a big trend reversal.

The VN-Index is setting up the 1-2-3 bullish mode and its short-term target price is 461 and 487 points.

The HNX-Index will target the 80-82 range to test the confirmation line. If it breaks through this level, the next target will be 96.

Vietnam’s stock market is now more positive than earlier this year. Market liquidity of 30 million stocks traded per session on each bourse is positive news for the market and brokerages.

From a technical view, the market is positive. Now we need to wait for the HNX-Index to cross over sensitive 82 point level. This will be a reversal point for the Vietnamese stock markets.