Monetary policy is gradually shifting from tightening to easing again. Following the two interest rate cuts in late March, the central bank has signaled another rate reduction is coming.
Money goes around flexibly
Contrary to former concerns, the stock market was undergoing fairly positive movements in the first half of May, with the VN-Index slightly picking up 1.5%. Liquidity has also displayed signs of greater improvement, as the trading volume increased a little in the second week of the month, suggesting cash flows are now more actively engaged.
In particular, even though the market has been grappling with a narrow range of transactions over the past three months, money has demonstrated its flexible circulations across a variety of industries, such as tourism, agriculture, information technology, retail, seafood processing, energy and raw materials, opening up a big opportunity for investors who are highly responsive and good at swing trading.
With regard to foreign investors, this group net sold another VND1.02 trillion in the first half of May, after nearly VND2.78 trillion on the HOSE in April alone, mainly because cash flows through ETFs continued to suffer net withdrawals. The selling force of foreigners is partly to blame for disturbing the psychology of domestic investors and hindering the market in recent months.
Most securities companies were rather discreet when giving forecasts about the market developments in May, although there has been no dreadful shock so far. There have been positive news reports about the macroeconomic policies, which has not given the market a major boost yet but has become a source of support.
The nearest resistance zone of the VN-Index is situated near 1,090 points, corresponding to the 200-day moving average (MA 200).
Previously, in late January and early April, the VN-Index once again took a dive when approaching this level. Therefore, it is likely that quite a few investors will have no choice but to take profits when the index is near MA 200 again. On the contrary, in case the VN-Index managed to make a breakthrough and stay firmly above this resistance line, cash flows from those who invest strategically would get more deeply involved.
There is a more important thing that needs the attention of investors: monetary policy is gradually making a U-turn to be expansionary again.
Following the two interest rate cuts in late March, the State Bank of Vietnam recently signaled another one is probably coming soon. Meanwhile, deposit rates at many banks reacted earlier as they have been further adjusted since the beginning of May.
Will monetary easing be beneficial?
At the U.S. Federal Reserve (Fed) and some other central banks around the world, after the tightening monetary policy has been in place for more than a year, the roadmap for interest rate hikes is now ending. That said, they still have to keep interest rates at high levels for an unspecified period of time to cope with rampant inflation, though this may pose recession risks to the economy.
In contrast, Vietnam seems to have reversed its policy earlier, seeing how exorbitant interest rates can potentially wreak havoc on the economy and business activities. Such a change is made possible because inflation at home, having been under intense pressure in 2022, has significantly cooled down in the first months of 2023, plus the exchange rate is now stable again and the system’s liquidity is more ample.
Other markets, from corporate bonds to real estate, which have been in troubled waters and influenced the stock market since 2022, have now been given a helping hand from several policies. In addition, large-scale property projects across the nation have gradually been cleared of legal obstacles so they can continue.
With interest rates dropping again, it is understandable why many forecasts believe that the business performances will start to recover in the second quarter before they achieve higher growth in the second half of 2023. Quite a few companies saw their profits hit the bottom in the first quarter, with a sharp decline, or even losses.
The recently issued Circular 02/2023/TT-NHNN not only relieves banks of the pressure of bad debt transfer and provisioning but also makes it favorable for enterprises to access credit and improve their cash flows.
Thus, there is a reason to expect bank stocks to perform better in the coming time and serve as an important driver leading the market to increase. The positive outlook of the market will likely be beneficial for securities firms as well.
Dragon Capital, in a recent report, stated that although bad debt remains a concern, the systemic risk has been considerably minimized. The recovery of the real estate industry depends on small- and mid-cap stocks, stocks of private banks, which benefit more from such a policy than state-run banks, have enjoyed a bigger price increase.
Moreover, electricity stocks are drumming up interest as the Power Master Plan VIII was officially approved by the Government on May 15.
To be specific, renewable power companies will be at an advantage since the plan prioritizes the development of this energy source, for it to make up 31-39% by 2030, equivalent to 5,000-10,000 MW. The number may rise to 47% with the conditions and commitments under the political declaration on forming a just energy transition partnership with Vietnam. The proportion of this power source in the system is expected to enlarge to 67.5-71.5% by 2050.