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Looser credit, lower inflation lifts shares
The economy has shown a number of positive signals in the first four months of the year, including an easing in interest rates and a more stable foreign exchange rate. Nevertheless, domestic companies are still facing difficulties in affordably accessing capital for business operations.
The most positive data was an inflation rate in April which fell to its lowest level in three years, a one-month increase of just 0.05 per cent. With the sudden increase in petrol prices at the end of March, the price index for transportation rose by 2.67 per cent, suggesting this would still be the area most likely to drive further inflationary pressures.
Less intensive inflation means that there is a higher probability for further cuts in interest rates in the coming months. The State Bank of Viet Nam has cut interbank rates by a percentage point for two consecutive months, a move that may ease the capital crunch for many local companies, as well as lower the risks in the banking system caused by rising loan defaults.
On the nation's stock exchanges, the VN-Index and HNX Index posted amazing returns in the first four months of the year, each gaining over a third in value. It has been the most impressive rally since the recovery of the market after the financial crisis back in 2009, when the economic stimulus programme promote flows of capital into the market.
April is normally the month for speculative stocks, following companies' reporting good first-quarter operating results. Very often, rumours about abnormal revenue in listed companies will be tracked closely and investment decisions will be made partially based on this kind of information. However, this kind of speculation is no longer a driving factor in the local market.
According to our statistical review, the most impressive sector in April was mining companies, e.g., Binh Dinh Minerals Co (BMC) and Binh Thuan Hamico Minerals (KSA) on the HCM City Stock Exchange, and Bac Kan Minerals (BKC) on the Ha Noi Stock Exchange. Calculating year-to-date returns, BMC and KSA each posted unbelievably high returns of 340 per cent and 240 per cent, respectively.
Interestingly, however, the rally of these stocks was derived from market factors only. BMC managed to perform, but BKC lost VND3.7 billion in the first quarter while Ha Nam Minerals (KSH) posted a loss of VND400 million ($19,000). Good operating performance is not the reason behind the strong rallies of shares in these three companies, which are all considered highly speculative stocks.
The correlation between mining shares and benchmark indices is quite high, suggesting that if the market is in an uptrend, these stocks will outperform the market. The beta of all three stocks is greater than 1, with the beta of BKC even reaching 1.43. Taking a look at the historical performance of these stocks, BMC had a long rally in 2006-07, with a ten-fold increase in value, while KSH recently saw its share price double within the first quarter. Therefore, these shares are preferred by risk-taking investors despite some weak fundamentals.
Purely influenced by market factors, these shares are good choices for speculators seeking an abnormal return in an uptrending market.
Domestic investors are looking forward to the official reduction in the pending time between transactions from four days (T+4) to three (T+3). When this regulation becomes effective, market liquidity will improve significantly. Recent efforts by local authorities have also helped increase the attractiveness of equity markets, as more products are added or activities of both listed companies and securities companies both more tightly managed in order to reduce risks. Increased cash flows are expected to be channeled into the stock market, suggesting an extension of the current rally and a positive outlook in the medium term.
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