Over-the-counter market turns frosty

After a period of strong growth from October 2006 to January 2007, the over-the-counter (OTC) market has gone through an adjustment to the point where many shares are stagnate.

So far, there is little sign of the OTC recovering in the near term, while the official market seems more stable.

Following the October-January hot streak, share prices have plunged on average by 40-50%, even blue chip stocks in key industries such as banking, insurance, and petroleum.

Many investors are finding it hard to make good deals and are willing to sell at a loss in order to restructure their portfolios.


There are a couple reasons for the OTC’s performance.

Firstly, this is a cyclical market. Similar to previous years, the second quarter is when the OTC goes through a seasonal downtrend.
In the first quarter, companies were releasing annual reports, organising shareholder meetings and announcing dividends. Moving into the second quarter, there is a slowdown in information to stimulate trading.
At the same time, the OTC is always sensitive to the official market, which too is experiencing a seasonal slowdown.

Secondly, plummeting bank shares have impacted the rest of the market.

When the OTC was going through its bull run late last year, banks accounted for 70% of the market’s daily trading value. So when the price of these blue chip shares fell, it brought about a general cooling in the market.
Earlier, bank stocks were trading at 6-15 times their face value, however due to factors such as the cyclical slowdown, investor sentiment and new capital requirements, prices tumbled.
Another technical factor impacting bank shares is the complex procedures in paying dividends via share options and new bonds, which frustrated investors who were once eager about dividends.

Most investors were short term speculators, and the primary driver behind market gains and losses; they provided liquidity.
Short term speculation is no longer in vogue as investors adjust their strategies toward medium term planning. As a result, bank stocks fell 30-50% with the OTC entering a cooling phase.

Thirdly, investors are now looking toward a few major initial public offerings including more banks and telecoms, and are looking to put their new-found wealth in other assets.

The outcome of the Dam Phu My and Bao Viet auctions have also had an impact on investor sentiment with many now questioning, "Are prices on the OTC over valued?"
From October to January, investors dumped a lot of money into the OTC market with the hope of turning a substantial profit as companies issued mass volumes of shares to increase their charter capital and prepare for dividend payments.

As a result, share prices on the OTC market surged far beyond their "real value" as short term and inexperienced investors gobbled up stocks.

These investors lacked the necessary information to assess the companies’ performance; they merely followed the herd.
Currently, investors are pouring money into real estate, the US dollar and gold. The greenback and gold have done so well that many other investors are now paying attention.

The dollar-dong rate quoted by the Bank for Foreign Trade of Viet Nam and on the black market has increased over the past few days. The main reason for the stronger greenback is commercial banks are buying more dollars to satisfy corporate demand for imports while supply is limited.
The dollar is trading around VND16,110-VND16,115, according to the State Bank of Viet Nam (SBV), while local gold prices have tracked global trends.

Finally, the State Securities Commission, SBV and other regulatory bodies are warning of risks when trading on the OTC. The Ministry of Finance has issued Circulation No 38/2007/TT-BTC on the disclosure of information by public companies, while the HCM City Securities Trading Centre passed a new regulation on share prices during a stock’s first day - both measures are aimed at lowering investors’ risk exposure.

By the same token, the new regulations also make it harder for investors to turn huge profits as they did in the past.
In addition, the State Bank of Viet Nam instructed commercial banks on May 28 to cap loans on securities investments at 3% of total outstanding debt. The decision has curbed financial assistance to securities investors and put pressure on commercial banks in collecting debts in order to comply with the regulation.

Thus to raise money to pay off debts, investors are looking to offload shares even at a loss.

Share supplies are also exceeding demand, which is forcing prices down even more dramatically.

We predict the OTC market will remain gloomy until August with prices starting to show real vitality moving into September. Until then, prices should stay fairly flat with only marginal gains.

Source: VNS