Five reasons for the cool OTC market

The prices of OTC shares have dropped by 40-50% on average since February 2007, when the market entered a new stage after a long period of heating up.

OTC shares all have been witnessing sharp price decreases, including the blue-chips. Analysts have said that banks’ shares have seen the biggest price decreases, by 40-50%, from their highest peaks. Shares of construction material companies also have seen considerable price decreases, by 30-40%, while shares of petroleum, power, mineral and securities trading companies have decreased by 20-30% in price from those seen during the February “share fever”. The price decreases have been slighter, 10-20%, for shares of financial, insurance and mechanics companies.

Analysts have identified five main reasons for the cooling of the OTC market.

First, both demand and supply are weak now on the OTC market. Investors now do not have money to buy OTC shares because they nearly emptied their pockets to buy shares in the period from October 2006 to January 2007. During that time, share prices skyrocketed, exceeding their actual values, though a lot of companies issued shares in order to raise their chartered capital.

Second, it is now the cycle of the OTC market to freeze. In previous years, the second quarter of year is always the time of freezing of the OTC market. Good information that may help stimulate share price increases is still absent at this moment. Companies have reported their business performances already; short-term investors are not braving danger at this moment by buying shares when prices are going down.

Meanwhile, the periodic falls of the official market have impacted the OTC market. Experts said that the share prices on the official bourse would further decrease before they bounced back at the end of the year.

Third, investors have been disappointed by the sharp decreases of banks’ share prices. Bank shares once accounted for 70% of the total transaction value on the OTC market, and bank share prices were once pushed up to abnormally high levels, 6-15 fold higher than their nominal value.

Fourth, investors are all anticipating the IPOs of big corporations, and they are not making deals at this moment. Moreover, they have other channels to make investment, including real estate projects, purchasing dollars and gold.

Fifth, state management authorities have warned about the big risks investors have to cope with when buying OTC shares at overly high prices. Meanwhile, the central bank has decided to limit the cash inflow from banks to the stock market by requesting that commercial banks limit lending for securities investment deals: commercial banks are not allowed have loans for securities investments in excess of 3% of their outstanding loans. Investors have been asked to pay debts, and they have more choices than selling shares to take money back.

Source: VNE