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|The second quarter is normally the weakest performance time of enterprises|
From a macroeconomic perspective, market pressures should ease up in August.
Key global indices such as the Dow Jones, S&P 500, FTSE and Nikkei have exceeded important support levels while the local macroeconomic situation is still under control in terms of inflation, gross domestic product (GDP) growth, trade balance and exchange rates. However, from a market perspective, the VN-Index is being influenced by a share surplus, lack of new cash flows, selling pressure and the cautious psychology of investors. These factors are interactive and not easy to change in the short term.
From a fundamental point of view, the market in August will have the following characteristics:
Reduced correlations between the local and global indices
After being driven by the global market for almost one quarter due to the impacts of the European debt crisis, local indices have shown their own performance features and slower recoveries compared to Dow Jones, FTSE or MSCI since the middle of July. In our view, the role of global indices in the context of VN-Index movements will continue to fade out in August and possibly the remainder of 2010 due to a number of reasons:
(i) The consequences of the recession and crisis risks have been much more transparent and not as critical as expected, hence the pressure on local investors’ psychology reduces significantly. Vietnam’s macroeconomic situation seems yet to experience direct negative impacts
(ii) Vietnam’s monetary policy is currently becoming more different from the world’s due to its own cyclicality, higher inflation levels and the continuous adjustments of regulations. Investors’ expectations regarding monetary approaches have dropped compared to the second quarter due to the lack of realistic and effective action from the State Bank. If the policies are insignificant compared to the previous quarter, monetary policies in 2010 will serve the minimum requirements for economic growth rather than be truly expansionary in nature.
A fairly stable macroeconomic environment
Without any leap in economic policies, what happens in August might just repeat July’s scenario:
(i) Low inflation, equivalent to June and July
(ii) Slight increases in the exchange rate in a controllable range, partly due to the increase in the demand of enterprises to repay the US dollar loans from the beginning of the year (credit growth in US dollars in the first half of 2010 is around five times larger than in Vietnamese dong)
(iii) GDP growth seems to be on the right track.
However, our biggest concern is the thin cash flows into the market through the expansionary monetary policy adjustments, which have experienced numerous obstacles. The recent order from the government is to keep 2010 credit growth in the range of 20-25 per cent. If credit growth stops at 20 per cent, investors should expect a zero change compared to the first half of the year (10.5 per cent), implying low possibilities of a market pick up. In the worst case, the market can pull back further from 500 points before any recovery. However, if the State Bank strives to reach 25 per cent, it needs to take stronger action, especially in the regulations for the usage of loans from the open market. Under the current conditions when the State Bank is focusing on enhancing the sustainability and risk management system of the local banks (such as the new regulations on the increase in the Capital Adequacy Rate (CAR)), we do not expect adverse decisions in the short run. In the past three months, while inflation was low and the State Bank took no U-turn action, it seems that inflation controls are more prioritsed than credit growth in 2010.
Second quarter financial reports expected to play no further directing role in August
By the end of July, with over 50 per cent of companies announcing financial results, the overall picture of the second quarter is fairly clear. In general, the results are of no surprise since the second quarter is normally the weakest performance time of enterprises. When the remaining companies announce the earnings in the first two weeks of August, we do not foresee any remarkable, positive changes in market trends. However, if the liquidity holds up well, investors might gradually start restructuring the portfolio towards brighter outlook candidates based on first-half results and predictions for the remainder of 2010.
What is holding off August’s market?
Under stable macroeconomic conditions, the market in August continues to be under demand-supply balance pressures:
(i) In 2009, while credit growth reached 38 per cent, there were limited companies listed. New share issuances being controlled in parallel with the buybacks healthily supported the demand side, which vigorously pushed up the market. Recently, despite warnings of the oversupply of shares, enterprises continue to announce the new share issuances and/or listing plans. With the credit growth of this year is about 50 per cent of 2009’s, the supply seems to be far overweight. Even if the State Bank loosens the credit growth, new cash might not be enough to absorb the new supplies of ‘cheap’ stocks. At the same time, some new regulations such as the increase in the CAR also limit the cash flows to the market and expand the selling pressure. We are not optimistic about the leap in the market in 2010, as what happened in 2009, and recommend investors remain cautious if cash flows do not improve in August
(ii) Bluechips or pennychips? The last two trading sessions of July showed some signals of improvements in the role of bluechips in leading the market compared to the second quarter’s average. However, big cash is needed for large caps to leap, which is not easy in the current situation as we analysed above. On the other hand, penny stocks still have advantages due to a more reasonable level of supplies and higher preferences from short traders. From the perspective of demand-supply, we recommend short-term investors to allocate a higher portion of wealth to medium size stocks with good financial indicators, being traded in the range of 1x-2x to seek for opportunities.
Recommendations of sectors and stocks in the third quarter can be referred to in the Sector Allocation Strategies Quarter III report published by SMES at www.smes.vn.