The stock market ended a volatile 2014 on a downtrend but strong fundamentals remain.
Ms. Pham Tran Huong Giang, Research Analyst, VPBank Securities
Vietnam’s macroeconomic trends have been consistent throughout 2014. The strong trade surplus of over $2 billion in the first eleven months and record high levels of foreign reserves managed to sustain a stable exchange rate, which helped bring inflation down to record low levels. Low inflation has allowed the government to implement significant cuts in bank lending and deposit rates. These improvements in macroeconomic conditions have been the key underpinnings of growth in Vietnam throughout the year. However, we still saw strong fluctuations in the stock market, moving in line with both world and local events.
Rumors regarding possible increases to foreign ownership limits (FOL) on listed shares were the main driver of the market uptrend in the first three months of the year. In November 2013 the State Securities Commission (SSC) submitted a draft regulation to allow foreigners to hold up to 60 per cent of the voting shares of listed companies instead of the existing 49 per cent. There are currently 15 stocks where foreigners already own the maximum shares allowed: VNM, FPT, KDC, SSI, DHG, BMP, PNJ, HCM, VSC, JVC, DMC, IMP, BBC, ST8 and TCR. Several others are near their limits. Had the draft been approved, more foreign capital would have been expected to flow into Vietnam stock markets. Throughout the year, however, we saw no progress towards implementing the proposed rules and at the beginning of December Mr. Vu Bang, Chairman of the SSC, said that the draft would be postponed until at least October 2015.
Foreigners may well choose another method to invest in shares that have reached their FOL during the long delay: domestic exchange-traded funds (ETFs). These ETFs have special benefits for foreign investors because they are not subject to foreign ownership limits and maintain a high degree of transparency. Two domestic ETFs were established during 2014: the VFMVN30, managed by VietFund Management, and the SSIAM HNX30, managed by SSI Asset Management. Many of the shares they hold are at or near their FOLs. While this product is still new to Vietnam and has not yet gained significant attention we believe that it will be a game changer for the stock markets over the long term and bring in new participants.
The market was fueled also by the issuance of Circular No.09/2014 by the State Bank of Vietnam in March. The circular delays until April of 2015 some articles of Circular No.02/2013, which imposes stricter rules on banks for the classification of non-performing loans. These were supposed to become effective in June 2014 and would have raised the reported NPL ratio in the banking system. The delay helped boost bank stocks.
Entering the second quarter, the stock markets suddenly collapsed in early May due to disputes between Vietnam and China in the East Sea. On May 10 the VN-Index recorded an intraday loss of over 6 per cent, falling below its key support level of 555 points. Both indices declined substantially with a huge number of unfilled shares when the markets closed. The session results demonstrated the panic of the crowd. But while domestic investors sold off stocks, foreigners net bought strongly. Foreign institutions overlooked the local geopolitical events and put more emphasis on the country’s fundamentals.
Shortly after the incident, tensions were brought under control and the market rebounded sharply. The VN-Index then followed an upward trend from the middle of May to September, reaching a record high since 2009 of over 630 points. Macroeconomic developments were the main contributor to the strong increase during this period. Lower inflation and record levels of foreign currency reserves improved Vietnam’s image with foreign firms. Moody’s and Fitch Ratings upgraded Vietnam’s long-term credit ratings to B1 and BB-, respectively, with a “Stable” outlook. Momentum towards cleaning up the banking system also received a boost when Circular No.18/2014/TT-BTP was issued in early September. It granted the Vietnam Asset Management Company (VAMC) more authority to sell collateral backing NPLs it had purchased.
Although stock gains were broad-based during this period the most impressive rise was that of PetroVietnam (GAS), with the largest market capitalization of any company on the HSX. From the beginning of the year the firm’s price climbed roughly 90 per cent to its peak of VND126,000 in late August, due in part to an agreement with ExxonMobil to develop the Quang Ngai City gas field.
However, our Q2 market outlook report viewed this market reaction as overbought. We felt that the VN-Index P/E ratio of 16.2 times was too high and believed the index would revert back to a more reasonable valuation of between 560 and 580 over the medium term. And we were right. The market started falling from the final month of the third quarter and continued its downward trend towards the end of the year. By the end of October the VN-Index had plunged over 10 per cent, to 580.
During October the US Federal Reserve terminated its QE3 program. There were concerns regarding a potential exodus of foreign investment but the announcement seemed to have little impact on the market. First, it had been widely anticipated for quite some time. Furthermore, although the Fed ended its stimulus program, it was still hesitant to raise interest rates so there was little movement of institutional money back to US capital markets. Besides, the European Union and Japan have begun their own easing programs for economic stimulus, which may offset some impact of the US moves.
Two other factors, however, have created significant market declines during the final quarter that nobody, including us, predicted. First was Circular No.36, which was issued on November 20. Even before its official release it had a negative impact on stock market sentiment. Circular No.36 limits bank lending for stock investment. In particular, Article 14 stipulates that the proportion of credit for equity investment must not exceed 5 per cent of a bank’s charter capital (down from the previous 20 per cent for securities investment). In addition, among other strict conditions applied, banks are allowed to offer credit to customers to invest in stocks only if their NPL ratio is below 3 per cent.
The total charter capital of the whole banking system is currently VND435.243 trillion ($20.4 billion). If we exclude VND86.636 trillion ($4.1 billion) of charter capital at foreign banks, who are not participating in the margin lending market, the total charter capital of banks available to provide credit for equity investment is VND348.607 trillion ($16.3 billion). Before Circular No.36 the ceiling level was 20 per cent of charter capital, and was estimated at VND69.721 trillion ($3.3 billion). Now we would have to exclude charter capital of banks with NPL ratios above 3 per cent, which is at least VND86.449 trillion ($4 billion). The remaining charter capital of banks that are eligible to provide credit for equity investment is VND262.158 trillion ($12.3 billion). Five per cent of this amount of capital is about VND13.108 trillion ($624 million), which is down 81 per cent compared to the prior ceiling level of VND69.721 trillion ($3.3 billion). The market reacted strongly to the expectation of funding flying out of the market. The VN-Index lost 35 points (5.8 per cent) within ten days, from November 18 to 28.
The second factor pushing down share prices was the steep drop in oil prices, to below $60 per barrel. Lower oil prices immediately affected the oil and gas sector, especially mid- and upstream companies. Stock prices dipped to low levels, with the most significant declines coming from GAS and PGS, although we note that GAS does not sell oil. This substantial loss had a big impact on the psychology of investors and created fears of increasing government deficits due to declining revenue from oil sales. These fears continue to drag the market down across the majority of stocks. However, lower input prices also help to reduce the cost of goods sold for many industries, such as transportation, fertilizer, construction, airlines, and others, which should be reflected in the forthcoming Q4 business results. The reduced cost should also help consumers when buying petrol for their cars and motorbikes and significantly impacted our forecast for 2014 inflation, bringing it down below 3 per cent.
The bright spot in the news during the fourth quarter came from the real estate sector. In late November the National Assembly approved the amended Law on Housing, which allows foreigners to own houses without any restrictions on the number or type of housing. We believe that these new features will have a positive influence in the long run on the property market, helping it to grow stably and reduce inventories and bad debts. The real estate market has been aided further by Circular No.32, amending and supplementing some articles of Circular No.11. The new law eased the conditions applied for subsidized lending programs and expanded the group of eligible borrowers. Therefore, the disbursement of the government’s VND30 trillion ($1.47 billion) loan package will be speeded up and implemented more smoothly.
Through 2014 the momentum of State-owned enterprise (SOE) reform picked up slightly but continued to lag behind the original plan. In the first nine months of the year SOEs divested VND2.3 trillion ($108 million), which was 3.7 times higher than in 2013 but accounted for only 10.2 per cent of the total planned divestment. As a result, the government must complete nearly 90 per cent of the divestment plan in 2015. The two highlight deals were Vinatex in August and Vietnam Airlines in November. In the meantime, due in large part to Circular No.36, bank stocks are no longer attractive to investors, pushing share prices to stay well below the government’s cost of investment. The large number of SOEs that need to be equitized in 2015 increases the pressure for the equitization plan to be achieved.
2014 has been a very volatile year for the stock market, with significant ups and downs driven as much by geopolitical events as by economic fundamentals. The year seems to be ending on a down note. But going into 2015 we believe that the fundamentals are still strong. Hopefully market performance will follow them.
- Year in review