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Interest rates going down, stocks will rise up
It is clear that there exists the close link between bank interest rates and the performance of the stock market. As the interest rates are on the decrease, investors have every reason to believe that the stock market will recover soon.
The predictions given by some domestic and international institutions recently all said that the basic interest rate tendency will continue in 2009 and that the basic interest rate may be slashed to 7.5% from the current level of 8.5% in the first quarter of 2009.
Prior to that, the State Bank of Vietnam made a breakthrough on December 22, 2008 when it lowered the basic interest rate to 8.5%, the sharpest cut since the monetary policies shifted from the tightened ones to loosened ones to serve the policy on prioritizing growth in October 2008.
Interest rates down, stocks up
KimEng Securities Company has released the analysis showing the link between the interest rate cut tendency and the recovery of the stock market. In general, stock investors always expect to get the profit higher than the deposit interest rate.
That is why when banks raced to raise deposit interest rates in mid-2008 (Eximbank’s twelve-month term deposit interest rate was over 18% per annum in August), and the profitability from securities investments was just 6.2%, the cash flew from the stock market to commercial banks.
That also explains why when the interest rates went down sharply in the second half of 2008, and the profitability from securities investments became more reasonable, stock investment has become more attractive.
According to KimEng, the VNIndex at 316 points, the profitability from securities investments at 10.4% and the bank deposit interest rate at 8.1% all have made the investments in the stock market more attractive than bank deposits.
So, what will happen if the basic interest rate cut tendency will continue in 2009, and the twelve-month term deposit interest rate stays at 7%?
With the expected scenario in which the GDP growth rate is between 5% and 5.5%, the profitability from securities investments will be 8.76%, still higher than 7% of the bank interest rate.
In theory, money will flow to the places which can bring higher profitability. Therefore, the further the interest rate goes down, the more attractive the stock market will be.
Slashing basic interest rates is the clearest sign of the Government’s policy on loosening the monetary policies, which means that the Government does not encourage people to make bank deposits while helping the capital cost become cheaper for production and business.
The current basic interest rate of 8.5% is equal to that of 2007. However, the Hong Kong and Shanghai Banking Corporation (HSBC) still believes that the interest rate cut tendency will continue.
In its report about the economic prospect in Q1 2009, HSBC said that other measures on loosening the monetary policies will be implemented continuously in Q1 which will make the basic interest rate go down to 7.5%.
Meanwhile, Saigon Securities Incorporated (SSI) even expects the rate to hover around 7% in Q1.
HSBC has predicted the 5.4% GDP growth rate for Vietnam in 2009 despite big difficulties, third to China (7.8%), and India (5.9%), while predicting minus growth rates for other regional countries and territories like Taiwan, Hong Kong, Singapore, and Japan.
Lao dong
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