VN Index likely to remain flat in the months ahead

The VN Index went through a phase of growth and then consolidation in the first half of the year, but will likely level out in the months ahead if conditions remain unchanged.
In the first phase, which began during the closing months of 2006, the VN-Index crossed the 1,000 point threshold to peak at 1,170 on March 12, 2007 with overall market value topping VND1.64 trillion (US$102.5 million).

Then in the second phase a correction took hold, during which the VN-Index fell below the crucial 1,000-point psychological barrier on April 22. The exchange rebounded in May, but performance remained weak. Now the index fluctuates around the 1,000 level, which is still 38 per cent higher than where it was six months ago.

Despite the impressive growth on the Vietnamese stock market - total market capitalisation is currently about 31 per cent of GDP (VND304 trillion or $20 billion), surpassing the State Securities Commission’s (SSC’s) 2010 target - and the strong 7.9 per cent economic growth rate in the first half of 2007, we do not see any evidence the exchange will again aggressively climb higher for the following reasons:

First, supply will likely exceed demand. During the first six months, the 40 companies that listed added almost 451 million shares to the market, while a stream of larger companies plan to host IPOs from now until the end of the year, including the country’s four largest banks.
News has also recently hit the market of other State-owned giants in telecommunications and brewing planning to go public in the coming months.

As a result, there are questions whether the market will be able to absorb this huge influx of shares, especially given demand currently seems to be limited.

Limited demand can be attributed to several factors, including Directive 03/2007 issued by the State Bank of VN (SBV) that caps a bank’s loans on securities trading to 3 per cent of their total outstanding debt. Although the SBV has extended the deadline for credit institutions to meet the 3 per cent cap until December 31, 2007, the directive limits investors’ ability to borrow money to fund securities purchases.

Demand levels have also fallen due to the huge sum of capital frozen in the over-the-counter (OTC) market where buyers are scarce. Investors are unable to liquidate their OTC holdings and seek opportunities on the official stock market.


Second, capital disbursement of foreign investment funds has slowed.

The stock market has become increasingly attractive to foreign players with companies such as VinaCapital and Dragon Capital creating additional foreign funds. In addition many fund managers are awaiting licenses to enter the Vietnamese market.

Unfortunately, there is still no time frame for when this foreign capital will be injected into the market, especially now there is little to no investment room in blue chips and other strong-performing stocks.

In addition, most foreign funds do not want to invest in the OTC market.

A foreign fund manager recently said he was unsure when his company would spend the $200 million it has in reserve because there was nowhere to spend the cash - a case of too much money chasing too few good deals. However, the fund still plans to buy into real estate and tourism projects.

In fact, many large funds - including VinaCapital, Dragon Capital, Indochina Capital and BankInvest - are investing in resorts, real estate projects and emerging companies, taking a temporary break from securities.

Based on the above assessment, stocks prices may not increase sharply in the second half of 2007 as seen during the second half of 2006. The VN Index will likely fluctuate in the 1,000–1,100 point range with hopes it will not sink as low as 900 points. Though, falling to the dreaded 900 level is a possible scenario, particularly during the third quarter.

SME Securities predicts that if Government agencies such as the State Bank (SBV) and SSC intervene in the market - for example by postponing a few of the large IPOs in the second half of the year or ratifying new regulations during the 12th Viet Nam National Assembly that begins this month - then the index could see another bull run towards the end of 2007.

Other positive changes would include the central bank abandoning the 3 per cent cap on securities loans, or the SSC increasing foreign ownership limits.


In conclusion, market volatility is unavoidable. Smart investors should be well informed and ready for anything on the bourse. Nothing will last forever. Optimism intermixes with pessimism. But, we all agree the Vietnamese stock market is still young and has more room to grow.

Source: VNS