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The market’s mood seems to have darkened with news some commercial banks failed to pay back interbank market loans despite some positive signs the economy may be turning the corner.
Inflation cools but risks remain for 2012
November’s consumer price index (CPI) increased 0.39 per cent on-month, bringing the 11 months’ CPI up 17.5 per cent against the end of last December.
Stabilising inflation is positive news. December expects to see no sudden jump in commodity prices, even though the Lunar New Year is coming as hikes in key input materials like electricity, oil and gas, water have not been seen. Inflation risks for 2012, however, remain due to following reasons:
- Global crude oil returned to $100 a barrel which will have negative impacts on economies as well as consumers. Central banks like the Federal Reserve (Fed), European Central Bank (ECB), Bank of England (BoE), Bank of Japan (BoJ), Swiss National Bank (SNB) and Bank of Canada (BoC) are pumping funds into financial systems to provide liquidity, preventing a financial meltdown or economic recession. History shows that risks in asset markets will rise when there is too much liquidity. Therefore, inflation risks to Vietnam are high as the country’s economy is opening.
- Domestic prices of electricity, petrol and coal are under pressure.
- In Vietnam, inflation is highly psychological and largely impacted by external factors. If the inflation question is not completely answered, we cannot hope for a market recovery.
Will deposit rates fall?
Interest rates depend on inflation expectations and capital demand and supply. Currently, inflation is cooling, but inflation fears are not fading. Evidence is that banks’ total deposits fell 0.74 per cent on-month in October after a 1.07 per cent on-month decrease in September. Meanwhile, demand for the Vietnamese dong is high while supply is tight.
Therefore, it is difficult for immediate deposit rate decreases in the short-term even with some positive signs of lower rates in export and agriculture seen. Some analysts said that in order to create liquidity, central banks should print more money. But, this view is not solving the basic problem.
We understand that the US and Europe are heavily pumping funds into the banking system, but liquidity is tight and the task of increasing liquidity has not been completely solved over the past two years. Vietnam should study this.
In Vietnam, in fact, pumping money also did not solve the problem of lowering high interest rates. The reason is that our economy is not disciplined and transparent, while the State Bank wants to protect weak commercial banks from bankruptcy. This means individual bank risks could become systematic. Profit is the most important thing for businesses. Therefore, bank money will find the most profitable businesses.
We realise the State Bank is becoming more transparent, such as regularly announcing commercial banks’ bad debts and strictly punishing banks that violate regulations. That is good news. The use of ceiling deposit rates will force banks with liquidity problems to raise charter capital or seek State Bank help. The selling of additional stakes to outsiders will increase the number of shareholders in and reduce risks.
If the State Bank continues with the current policy, there will be difficulties and challenges in short-term. But, it will be positive in the longer-run. Pumping more money is not the best solution as a stabilised financial and monetary system is needed for a long-term market recovery.
Is gold an alternative investment channel?
China and central banks around the world are pumping more money to create liquidity which could make gold prices soar. Therefore, if gold prices keep soaring, equity market will be less attractive. Remittances to Vietnam sharply increase late in the year. If the State Bank pumps more Vietnamese dong to buy hard currencies, liquidity will improve.
After long bearish stance for months, the VN-Index is moving sideways with some positive technical signs of a double bottom reversal. The current support level is in the 360-380 point range. Resistance is at 410-430 points.
A new bottom history for the HNX-Index was formed in November. A series of positive technical signs supported a short-term uptrend and the overselling sentiment is a good indicator for bottom catching. However, the market recovery must go with increasing liquidity. If not, it might be a false signal.
Economic fundamentals will not improve quickly, but investors can hope for a market recovery after a long fall in the past months as technical indicators are showing positive signs. In the meantime, there is possibly that a short-term loosening monetary policy is underway.
The long-term market bottom depends on macro news and investors’ confidence. Long-term investors should wait for better opportunities. For short-term investors, technical charts will be important for decisions. Be flexible with your choice. Move with the times.
Investors can visit www.smes.vn for further information.