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Friday, February 3, 2023

Money is no longer easy

By Dung Nguyen

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Following the thriving 2020-2021 period, the VN-Index took a U-turn and fell sharply in 2022 amid a significant change in the macro-economic context, the global situation and internal problems plaguing the economy.

In early 2022, the stock market continued its upward momentum from the preceding year, hitting a record high. The VN-Index closed at 1,528.6 points in the first week of the year, to be soon challenged by a series of dramatic events: the land auction in Thu Thiem, external risks such as expectations of the Fed’s interest rate hikes, or the conflict between Russia and Ukraine. Even so, the index did not go down but fluctuated at 1,450-1,550 points instead.

That said, the market underwent an upheaval as soon as several corporate leaders were arrested for price manipulation on the stock market, followed by Tan Hoang Minh and An Dong under Van Thinh Phat.

As a result, the trend of the VN-Index reversed from upward to downward, with two major downturns and the widespread phenomenon of forced selling. During the first downturn, the index plummeted 23.1%, down to 1,172 points in just one month. The second one lasted longer, from early September to mid-November, whereby the VN-Index once sank to its lowest in the year at 873 points.

As per a report by VNDirect, the VN-Index, as of November 22, delivered the worst investment performance in Southeast Asia, with a decline of up to 36.5%. Most industry groups were hit by a slump, especially finance, with a drop of some 61%, followed by steel (over 59%), construction (nearly 55%), and real estate (49%). However, in the opposite direction, defensive stocks such as water, gas and beverages enjoyed positive growth.

In December, the index significantly recovered from its bottom, but in general, the downward trend prevailed during the year, with a U-turn on a series of macro- and micro-economic indicators.

Reversal in interest rates

Interest rates, an important factor affecting cash flows into the stock market, took a U-turn last year, making the money supply more limited.

The pressure on interest rates is mainly ascribed to the rise of the greenback as the Fed considerably tightened its monetary policy to combat inflation. The U.S. Dollar Index ascended to a peak of more than 114 points on September 26, up 19.3% against the year’s beginning, before it cooled to over 106 points in late November.

The appreciation of the greenback severely affected the exchange rates of most countries, including Vietnam. As of late November, the exchange rate had gone up 8.4% against the U.S. dollar but was still considered better than many other currencies in the region.

At the climax, the State Bank of Vietnam adjusted up interest rates twice, adding 100 basis points each time. Other solutions to keep foreign exchange in check had earlier been adopted, including selling the U.S. dollar and widening the trading band of the Vietnamese dong.

Later, however, a race of deposit rates took place as there was a problem with liquidity. The costs of bank capital escalated, with lenders having competed with one another over interest rates since late September.

In the interbank market, interest rates from around 1-2% jumped to 5-7% per annum. In the stock market, margin lending rates quoted by major securities companies shot up from 6-9% to 13-15% a year.

The liquidity of the baking system later gradually stabilized thanks to the intervention and support from the operator. The overnight interbank rate once peaked at 8.4% during this period, but then dwindled to 4-5% per year.

The good news at the end of the year for the stock market was that banks were granted an additional credit growth quota of 1.5-2 percentage points (although not applicable to all banks). Still, the destination of cash flows and the absorption capacity remain a big question.

Reversal in investor sentiment

One cannot fail to consider the efforts to make the stock and corporate bond markets transparent. In October, the situation worsened as customers rushed to withdraw money from SCB, along with the trend of withdrawing money from bond investment funds.

Financial institutions, including banks and securities companies, were forced to take a defensive stance to protect their own liquidity as soon as Decree 65 took effect.

“The sharp decline in issuance came not only from the new provisions of Decree 65 but also from the apprehension of both investors and issuers in response to a series of debt default and legal risks for the issuer in the current context,” says a Fiingroup report.

This has led to a reversal in the financial system’s liquidity, including the stock market. The average trading value on all three exchanges shrank by 22.3% year-on-year, with a tumble of 19.6% on the HOSE alone.

Even the sentiment of individual investors was negative. The number of new securities accounts opened by individuals has ebbed since June, following the Tan Hoang Minh incident, but the sell-off trend has not yet ended. Securities firms are constantly subject to forced liquidation due to the lack of buyers amid the market’s concerns that businesses do not have enough money to pay for the bonds falling due at the end of the year.

In late November, the market suddenly staged an impressive recovery, with the VN-Index making a leap of 20% from its bottom. This is attributed to the expectation that the Government’s support will help with the uncertainties in the real estate and financial markets. Besides, the switch from pessimism to optimism is partly thanks to foreign investors’ significantly stepping up their net buying.

Reversal in corporate valuation

In early 2022, the group of stocks related to the commodity market suddenly experienced an upsurge in the context of the Russia-Ukraine conflict and the supply chain’s constant hardships. As a result, commodity prices got pushed up, leading to an increase in the price of many stocks, such as Hoa Phat Steel. However, things changed from June onward.

In the third quarter, Hoa Phat incurred a loss of over VND1.78 trillion due to soaring costs, exchange rate valatility and a high level of inventory.

Overall, in the first nine months of 2022, the company’s revenue grew 10% year-on-year, whereas its profit after tax declined by 61.4%.

In a recent report, KIS Securities Corporation remarks the slump Hoa Phat sank into was beyond what the market could envision. As the situation remains gloomy for the steel industry due to rampant inflation and sluggish global demand, KIS has revised its after-tax profit forecast for 2023, down by nearly 57% compared to the previous one.

Similarly, BaoViet Securities Company in a recent report has lowered its 2022-2023 profit forecast for Mobile World Joint Stock Company. The target price of MWG, the stock of Mobile World, is therefore 17.8% lower than formerly evaluated.

A thing in common is that exorbitant interest rates and a rising exchange rate have exerted pressure on input costs, and the drop in the number of orders has blighted the business prospects of all industry groups, leading to a fall in stock prices as a consequence. Nevertheless, quite a few securities experts believe the market valuation is currently appealing for those investors with a long-term vision.

What to expect in 2023

In their year-end update reports, many international organizations remain optimistic about the positive growth prospects of Vietnam, despite the recent reduction in international orders.

Another bright spot at the end of the year was the positive cash flows from foreign investors, both direct and indirect. Contrary to their constant net selling in the first quarter, foreigners have been more active as buyers since April, with massive net buying even during the sharp downturn in November. The value of transactions with foreign entities markedly expanded from 6.2% at the beginning of the year to 14.8% in late November.

That said, foreign cash flows can hardly play a pivotal role in maintaining optimism without solid macroeconomic fundamentals. From this perspective, to find anything positive in 2023, it is a must for macroeconomic policies to send out clearer signals, which at least come from the opportunity for a reversal in the monetary policy. Money will, of course, no longer be as easy as before, but it cannot be too tight either.

One still needs to further observe the international situation, the dollar interest rates and inflation worldwide. Will central banks around the world raise their interest rates further to curb inflation, or will they do the opposite to avoid a recession?

This question cannot be answered at once. In fact, there are still divergent views on when interest rates will peak around the world. And no one can tell for sure which unusual events will occur, such as the tension between Russia and Ukraine in early 2022.

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