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Friday, July 19, 2024

Stock market waits for East wind

By Trieu Duong

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Although Vietnam’s stock market has come under pressure due to global financial market volatility, the VN-Index had still maintained its upward trend since mid-November last year.

A variety of supporting factors

Now that a series of policies aimed at supporting the economy, especially the stock market, have been deployed, it is understandable why the domestic stock market has stayed almost unscathed despite the international stock market roller coaster.

First of all, there are groundbreaking solutions introduced in Decree 08/2023, which amends, supplements and suspends a number of articles in those decrees on the private placement and trading of corporate bonds in the domestic market and the sale of such bonds overseas. This is an attempt to cope with the liquidity deadlock and restore confidence in the corporate bond market. Particularly, businesses may extend their debt payments for up to two years and use other assets to pay for their bondholders.

The regulations designed to determine the status of professional securities investors as individuals and those on compulsory credit rating by the end of December 31, 2023, now have their enforcement put off.

Most recently, in the final days of March, the State Bank of Vietnam (SBV) introduced the draft of a circular amending and supplementing a number of articles and stopping the implementation of Clause 11, Article 4 of Circular 16/ 2021/TT-NHNN, with provisions for the sale and purchase of corporate bonds by credit institutions. With this, things are made easier for credit institutions to buy back those corporate bonds meeting the prescribed conditions by December 31.

Elaborating on this proposal, the SBV said while the corporate bond and real estate markets are struggling at the moment, it is necessary to have timely solutions and regulations from many sides to lend a helping hand and remove the difficulties facing these markets, thereby contributing to macroeconomic stability. Over the past year, the hardships experienced by corporate bond issuers, especially realty firms, have spread and affected the stock market. Therefore, once these two hot spots are properly addressed, it would help the stock market recover.

Besides, the Government’s resolve to step up public investment will have positive impact on other sectors of the economy, from construction and building materials such as iron, steel and stone, to real estate, those industries with significant contributions to economic growth  and a considerable number of enterprises with a high capitalization rate on the stock market.

The factors that cause fuel macroeconomic instability, such as inflation, exchange rates and interest rates, have stabilized. For instance, the Vietnamese dong currency has shown signs of going up against the U.S. dollar, paving the way for the central bank to resume buying foreign currencies to build up foreign exchange reserves. Additionally, the consumer price index has dropped for three months in a row, facilitating interest rate cuts.

Waiting for the east wind

The biggest challenge for the stock market is probably that economic growth is slowing as businesses are still scaling down their operations, partly due to the risk of recession in major economies, which are also Vietnam’s major trading partners. Therefore, growth as a variable will be closely monitored in the coming months.

In the past, when growth slowed and the risk of economic downturn emerged, central banks around the globe had no choice but to stop tightening monetary policy and even relax it. This seems to be the case with Vietnam at present as the SBV has cut key interest rates twice in just half a month, while launching credit packages for enterprises active in priority fields.

The central bank’s interest rate cuts in mid-March seem to have a limited impact, given little response from the stock market. But the latest rate reductions (effective on April 3) are expected to prop up the market stronger, as the three key interest rates—the refinancing rate, the ceiling interest rate on deposits of less than six months and the ceiling rate on short-term loans for the preferred sectors—now have fallen by 0.5 percentage point per annum.

The stock market reacted favorably early in the first week of April, as the VN-Index rose by nearly 15 points, equivalent to around 1.4%, with the trading volume making a leap to some 779 million shares on the HOSE alone, which is more than 1.5 times over the average trading volume of the last 20 days. A series of real estate stocks advanced strongly while construction, building materials and securities stocks also grew positively. These are the industries with heavy reliance on loans, so they benefit greatly when interest rates inch down.

Real estate stocks, in particular, received good news on April 1, when the SBV wrote to commercial banks and its provincial branches to guide them and request the implementation of the lending campaign for low-cost housing, worker homes, and renovation and reconstruction of aging apartment buildings in accordance with Resolution 33/NQ-CP of the Government. This loan package worth VND120 trillion may last until the end of 2030, with a preferential interest rate of 8.7% per year for investors and 8.2% for homebuyers, applicable until June 30, 2023. From July 1 onwards, every six months, the central bank will set lending rates during the preferential period for those banks participating in the program.

This program is expected to help real estate companies restructure their operations, customer segments and the products they offer the market, thereby overcoming the difficulties and challenges they have been coping with. Not only that, construction and building materials stocks will benefit from such a policy as well, when the demand for products from these sectors may recover.

As for securities firms, a better stock market outlook will bring them back to the phase of more positive growth. As interest rates keep trending down, plus a massive cash flow probably returning to the stock market and higher demand for margin loans, this group will enjoy greater profit after more than a year of decline.

In the coming time, investors may expect more information about when the new trading system developed by KRX will be put into operation, probably in mid-2023. This will support the new trading solutions in the market, helping with the implementation of clearing and settlement mechanisms and taking Vietnam’s stock market closer to international practices, which may be a plus when the market is evaluated for upgrade into an emerging market.

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