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Investors to sit on the fence during March   2010-03-08 - VNS

Macroeconomic fundamentals remain decisive factors for market performance and investors’ behaviour in March, writes SMEs Securities Company’s research and investment director Nguyen Viet Hung.

The market in February was fairly inactive, following January’s trend, bouncing between 480-500 points during most trading sessions.

Liquidity was still a big concern and the situation is getting worse. On February 10, only slightly over 19 million shares were traded on the Ho Chi Minh Stock Exchange (HoSE).

The worries of investors, particularly retail ones, in terms of the macroeconomic stability, especially from monetary policies and the psychology of cashing out before the Lunar New Year, strongly affected the market. Although foreigners remained net buyers, the volume was not large enough to change the market’s sentiment.

In February, the most noticeable event was probably the State Bank decision to increase the US dollar-Vietnamese dong exchange rate and apply the ceiling US dollar deposit rate for enterprises. However, such adjustments did not surprise investors. The market reacted positively in the last trading session prior the Tet holiday, but not strong enough to turn heads.

Many investors are not optimistic about March. However, market movements could be potentially more significant. Generally, the health of the macroeconomic fundamentals remains a decisive factor for the market’s performance and investors’ behavior.

Any significant State Bank move can adversely change investors’ psychology and the market environment. Corporate news continued to play a secondary role in retail investors’ investment decisions. The following is how we see March panning out.

A fundamental point of view

Macroeconomic indicators are going to be dominant factors in March. The key information flows are likely more pessimistic. February’s consumer price index (CPI) was announced to be 1.96 per cent, lower than the forecast 2.4 per cent. Investors, however, perceived the news with scepticism since that number did not include the nine-day Tet holiday. That implies March’s CPI is going to pick up and could potentially spike due to the impacts of higher price levels after Tet, the increase in petrol prices in the last week of February and electricity price adjustments by 6.8 per cent from the beginning of March.

Although inflation is putting pressure on the base interest rate, we believe that such impacts are psychological since a majority of enterprises are borrowing at the premium of the cap rate due to supplementary fees and the State Bank has been forced to remove the ceiling rate regulations. If the second becomes true, the base rate becomes meaningless. However, up to now, the State Bank has stayed still. We believe that such a decision very much depends on March’s CPI figure. As a result, the State Bank’s solutions are less likely to have impacts on corporate earnings and the short-term money supply.

Looking back, during January, corporate 2009 financial statements did not seem to have been priced in. The underlying reason comes from the dominance of the concern of macroeconomic indicators, hence investors’ behaviour. We consequently believe that the restructuring of portfolios are not going to happen in March particularly from retail investors, so it is not going to support market liquidity. However, upon the visibility of the macroeconomy, restructuring can happen vigorously to price in enterprises’ potentials.

For medium and long-term investors who are bullish on the market in 2010, this is a great time for disbursing funds and take strategic asset allocation towards sectors and stocks with better prospects.

On the same argument, we forecast the credit loosening is not to happen soon. Fund flows into the stock market are not going to change compared to January and February. Noticeably, even in the first two months when credit was tightened, many securities firms did not even use up their credit limit to support leveraged investors.

Retail investors still held large amounts of cash in their accounts, even up to 70 per cent. It meant low liquidity was not purely due to monetary tightening, but from the psychology of investors who were not ready to take action under unclear market trends. The market will continue this trend towards March with low liquidity until information becomes shaper.

Compared to other stock markets in the region, 2009’s price-to-earnings (P/E) ratios in Vietnam were only behind India. However, excluding the five stocks with abnormally high P/Es (VCB, ACB, STB, BVH, and VIC). The P/E of Vietnam’s market stayed at a 13x-15x range, equivalent to the regional average. In the first two months of 2010, the VN-Index also dropped by around 4 per cent, similar to the average.

The VN-Index’s day-by-day movement nonetheless has no clear correlation with the global market. Overall, given the macroeconomic difficulties in 2008-2009 are forecasted to continue in 2010, Vietnam’s market is now more in parallel with the region. In the short-term, we may not see any surprisingly high fund inflows to the local stock market.

The recovery, to much extent, is going with the global trend. If investors are fundamentally bullish on the global economy and Vietnam particularly in 2010, this is a good time for investments in good stocks, especially in the energy, retail, tourism-related and consumer product sectors.

Technical point of view

Surveying technical analysis tools, including standard and user-defined from various institutions predicting Vietnam’s stock market performance during 2010’s first two months, we see highly inaccurate forecasted results. The main reason might come from the very low level of liquidity and unclear market trends. As a result, investors purely relying on a technical approach in March will face substantial risks. We believe that the 480-520 range that has existed for the past two months is going to hold well into March, until the ‘turning’ news appears.

During six to nine months, most technical analysis agrees on a market recovery. The warning, from our point of view, is that technical approach should have more referral values in the long term, implying a great deal of risk in Vietnam’s market. We also took a closer look at the correlations between the indices and the volumes traded over the past two years in the HoSE and the Hanoi Stock Exchange (HNX). It reveals that periods of market stagnancy at low liquidity normally signals a strong recovery in the near future.

From the chart, it can be seen that the current liquidity is equivalent or lower that of July and beginning of December 2009, both of which were followed by strong market gains.

Therefore, March could be the ‘bottom’ month for the recovery in the second and third quarters of 2010.

Behavioural points of view

From the two points of view above, investor psychology has been more or less mentioned. It is affected by the following factors.

(i) Global investors’ psychology is undoubtedly unstable and global indices are volatile in the downward trend. The mixture of good and bad news has caused massive uncertainty for big bets. We believe that such a global sentiment will continue to impact local investors;

(ii) In Vietnam, the State Bank’s actions are unclear with surprising scenarios. Rumours on the monetary policies and conflict economic scenarios in 2010 imply risks. The situation is forecasted to roll over to March;

(iii) Low liquidity is an optimal condition for short-term traders. Investors with large cash in their bank accounts are not ready to disburse since if the market moves adversely, loss-cutting is difficult. At the same time, if the market is stagnant, the returns and risks on cash deposit could outperform. Generally, investors’ psychology has been and will continue to dominate Vietnam’s stock market in March.

The fact that investors ignore corporate news and care mostly about the macroeconomic health implies that all have the same concerns and are going to make the same moves. Investors are willing to buy stocks at higher prices after the economy is on the right track rather than take risks in the current market environment, even at discounted prices. Definitely the current listed market is quiet, while different approaches do not deliver consistent signals. Often, a market dominated by the concerns on macroeconomic factors can move very rapidly.

We recommend investors to buy gradually at the good price zone (480 points) to fully realise gains in expectations of the market recovery in the medium and long term and to restrict short-term trading activities. Investors should watch closely moves from the global economy and the State Bank, especially ones related to the monetary policies.


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