Is the Vietnamese stock market poised to sink?

Despite the sell-off by some foreign investors last week, the VN-Index escaped relatively unscathed which showed how mature local investors have become by avoiding the herd mentality previously seen in similar situations. The market zigzagged as investors resisted the sell-off pressure.

May also was a good month for the market compared to April; the VN-Index did well from April 25 to May 15, though it did not pass the 1,070 level as predicted by many analysts.

Moreover, the unprecedented number of people who registered for the recent Bao Viet IPO has raised hopes that the market will pick up steam in June, which might mark the beginning of a bull run through the end of the year.

Nevertheless, I do not share the optimism. In the short run, one to three months, I do not think the market will enter an uptrend, especially in June as many people hope. Contrarily, the market may experience a downtrend during this period due to the following reasons:


First, there are now growing indications that the State Bank of Viet Nam (SBV) could soon move to impose capital controls on foreign-equity investors, including a one-year lock-up on portfolio investment inflows.

Although SBV officials have tried to relieve foreign investors, Phung Khac Ke, central bank deputy governor, said that every country applies certain technical barriers to monitor the market and allow it to develop along the right track, or the track the Government wants.
Every country wants prestigious and capable investors, who can ensure the sustainable growth of the market.
"These are technical barriers, not policy barriers," Ke stressed.
When asked if the majority of investment funds would withdraw from the market under such a policy, Ke said the regulation, if enacted, would not be retroactive, which means that funds in operation that cannot meet the new regulations would still be allowed to conduct business in Viet Nam.

Foreign investors, however, remain uneasy about the new restrictions. Foreign investment banks operating in Viet Nam, including Credit Suisse and ANZ Bank, have already issued warnings to their clients about the possible introduction of new restrictions.

In fact, this might put a brake on foreign funds pouring into the Vietnamese stock market, or even worse encourage foreign investors to sell their domestic holdings in the short run, and wait to see how the new regulations will affect investments.


The second factor that could force the VN-Index lower is the central bank letter instructing credit institutes to limit outstanding loans funding securities trading deals to 3 per cent of their total outstanding loans.

On May 28, the central bank released Instruction No 03 on controlling the scale and quality of credit loans given to securities investors.

The central bank has asked commercial banks to follow the current regulations on loans for securities investment deals promulgated by the SBV, which say that all loans for securities trading deals must be guaranteed by mortgaged assets.

If the instruction by the central bank to place a 3 per cent cap on loans is enacted, the stock market will suffer as cash flows will decline dramatically.
Loans to fund securities trading deals have been booming for the last two years.

The Asia Commercial Bank (ACB), for example, has reported an increase of 30 per cent in loans to securities investors in the first quarter of 2007 compared to the fourth quarter of 2006.
According to Bui Tan Tai, ACB deputy director general, the limit at 3 per cent of total outstanding loans is nearly used up.
Tai said that though the stock market had declined in recent days, the number of clients asking for securities loans was still rising.

Other commercial banks did not reveal the exact figures of their outstanding loans funding securities trading, but said their outstanding loans had also nearly hit the bar.
The fact of the matter is commercial banks find providing such loans a lucrative business and do not want to miss out.


The third factor to negatively impact the market over the next month is the upcoming IPOs of large companies from now until the end of the year, starting with Dam Phu My and Bao Viet and followed by some of the big Government banks such as Vietcombank and Incombank.
If all these IPOs hit the market on time as planned, then they will draw huge cash flows from the market and have a major impact on share prices.

In order to participate in these new IPOs, players must find a way to fund their new investments, either by selling shares in their existing portfolios or borrowing money from the banks by using their assets as collateral.

To ensure their outstanding loans are within a margin of safety, investors will have to sell shares to pay off their debts at the banks, and this will affect market cash flows.


Though the three-above mentioned factors could pressure the market lower, I personally hope the VN-Index stays within the 1000–1100 band because there are still some good pieces of news on the market.

For examples, during the recent meeting among financial sponsor countries, the majority of delegates were confident about the economic progress Viet Nam has recently achieved. In addition, the World Bank (WB) is optimistic that the Vietnamese economy could maintain a high economic growth rate in the coming years.

Another positive factor is the growing list of new foreign funds now awaiting licenses to enter the local stock market.

We also have to consider a few large Vietnamese brokerages entering the short-term trading game for profit. The brokerages may cause a herd mentality among individual investors in short-term trading, but they can also keep the index trading in the tighter band. Therefore, the VN-Index may not fluctuate much.

If it can stay within the 1000-1100-point range through June, it will be a good sign for the market and could stimulate a bull run in the fourth quarter.

Source: VNS