Vietnam stock market outlook 2012 commentary: FY2011 was a year to forget for the Vietnam stock market. With slowing M2 growth and restructuring in both the bank and brokerage sectors technical selling pressure accelerated throughout the year. The shrinkage in liquidity was unprecedented as it came from several factors at once; a simultaneous series of macro & micro adjustment of imbalances that hit the market like a perfect storm. Talk of a year-end rally quickly ended as trading rally after trading rally over the last few months of the year ran into a wall of technical selling. Valuations fell steadily and by the last trading of the year the HoSE was trading at a forward FY2011 PE of 6.8xs and PB of 1.5xs. The Hanoi market was even cheaper trading at a forward FY2011 PE of 3.9xs and PB of just 0.8xs.
Since then the market’s recent modest little rally has brought us back again towards year-end levels. And while the recent 7 day run-up has run into some selling pressure sentiment has improved by several degrees. However we would still characterize this as a trading rally caused by an easing in selling pressure related to some position unraveling and portfolio restructuring at the year-end. Even so there is a growing belief (or hope depending on how you see it) that post Tet some measures will be taken to restore some liquidity to the interbank market. In addition we also await some proposals to boost stock market sentiment although on past form we are less hopeful for anything substantive here.
Of these three factors, improving the liquidity position of small & medium sized banks would have the biggest impact on market sentiment. At the moment the interbank market is still requiring collateral for lending which effectively locks many mid-sized banks completely out of the market and prevents most banks from meeting all their requirements. Hence pressure on the SBV is growing to help restore the interbank market to some degree of normalcy. If larger banks can be persuaded to ease their strict approach to counterparty risk this would release some of the stagnant pools of liquidity into the whole system. This is not a case of accelerating M2 but simply allowing for the efficient circulation of the liquidity already present in the system. Boosting the money multiplier if you like.
What form might these measures take? We think the SBV would need to work to reduce perceived counterparty risk by either abolishing the 14% deposit cap or actively recapitalizing restructured banks. The former would enable medium sized banks to raise deposit rates to attract new customer deposits. This would partially offset counterparty risk and make them more viable partners again in the interbank market. While injecting long term capital into restructured banks would also directly reduce the counterparty risk. However it seems neither will happen in Q1 at least.
The central bank governor did recently appear to scotch hopes for an early abolition of the 14% deposit cap indicating that it would remain in place for the 1-H FY2012 at least. The media has noted recently that more banks seem to willing to risk breaching the cap and offering deposit rates up to 17% in some cases. This appears to be related to pre-Tet funding demand with smaller banks in particular funding themselves short of cash. Some offcials of the central bank did speculate about a possible relaxation of the cap back in December but clearly the governor feels it still serves a useful purpose.
The purpose of keeping the cap in place for now is likely related to the ongoing process of persuading some smaller banks to consolidate. In the same interview he said another 5-8 banks might enter this process in Q1 following the example of the three banks that merged to form Saigon Commercial Bank in Q4 last year. It seems that we have now reached a fairly sensitive point in this process and perhaps the governor does not want to send mixed signals to these banks by easing up too quickly.
Our guess is that he will want to complete the first phase of banking sector consolidation (at least in terms of formalizing the mergers and announcing the result) before considering any easing in the monetary regime. While interest rates are expected to fall from February but this will not initially lead to any meaningful increase in liquidity in our opinion. Currently larger banks have excess liquidity but are unable or unwilling to disburse this due to high perceived counterparty risk. Lower interest rates might lead to a slight increase in demand for loans but won’t reduce perceived counterparty risk.
This matters because improved liquidity is a prerequisite for a turn in the stock market. Yes it’s true that both larger brokers; many institutional clients and some individuals have cash on hand to kick start a rally. However they are reluctant to commit this cash unless they feel some follow up buying behind them. And that depends on opening up the banking system again to normal operations. Remember we are not expecting any pick-up in M2 growth at least in the 1-H.
So short of abolishing the cap the SBV might extend the life of existing refinancing loans or make further loans. And start thinking at least of how to recapitalize restructured banks. If this is well signaled in advance the market could well rally sometime after Tet. Especially if the government chooses to announce some market supporting measures such as a capital gains tax holiday or some easing in the margin trading rules. However on the other hand if the SBV keeps its cards close to its chest then it will be hard for the stock market to have any kind of sustainable movement before then. Although we are likely to see some short term trading rallies before then now that valuations look so cheap; interest are likely to fall and the technical selling appears to have ebbed for now at least.
Valuations are currently very cheap but confidence is very fragile. Everyone is waiting for someone else to invest their money first. And so volumes remain very low especially of you strip out the recent spate of large put through. Confidence is what is missing. We know that brokers (the 13 listed brokers we follow had some VND9.16 trillion in cash at the end of Q3) and many funds have gathered cash in recent months. They are awaiting a spark. Lower interest rates will certainly be helpful if only in terms of lowering the return on cash in the bank however we feel some gesture on improving money circulation inside the banking system holds the key. Even so while the exact timing of a move to the upside is hard to pinpoint we sense that the market is trying to confirm its recent bottom. And with some confidence boosting measures in the offing an extension of the current trading rally after Tet is very likely. Hence we see any short term downside as opening a nice buying window for all players regardless of their time horizon.
Vietnam stock market outlook 2012 summary:
Equities are cheap; nobody wants to touch them so clearly it’s time to start buying
• Year-end selling pressure has abated but sentiment remains very fragile.
• A chronic lack of liquidity due to a combination of macro and micro measures still plagues equities.
• Even so markets look very oversold.
• And CPI is decelerating while the currency has been very stable for several months.
• But ongoing financial sector restructuring and growing NPLs are still big concerns.
• Falling interest rates will help a bit but really we need more liquidity.
• And while 1-H FY2012 M2 growth will remain low we expect some micro liquidity constraints to be eased soon.
• These include the 14% deposit cap and the fact that the interbank loan market is hardly functioning.
• The SBV will address some of these issues before the end of Q2 which would be positive for stocks.
• Then from the 2-H we expect M2 growth will begin to accelerate.
• As for FY2012 corporate earnings HSC forecasts a slower top line growth but big improvements in the bottom line.
• And we note the equity markets look very cheap at 6.9xs and 3.7xs FY2011 PE.
• We expect to see some trading rallies in the 1-H but the next major up-cycle market won’t begin until the 2-H.
• We forecast the VN index (soon to be superseded) will end the year at 550 or so.
• For medium term outperformance we recommend investors buy “best of breed” stocks.
• We suggest a move into interest rate sensitive stocks only after M2 growth accelerates.
0 comments:
Post a Comment