Intellasia News Services -- When the cash flow is choked off

When the cash flow is choked off
Source: 03-JUL-2009 Intellasia | 01/Jul/2009 The Saigon Times Daily page 2
3 Jul, 2009 - 7:00:00 AM
No bad news from listed firms is reported but their better performance; no negative macro-economic indicators emerge, all but the recovery said to be back on track. To investors' frustration, however, the local stock market has tumbled over recent weeks, and is bracing for further ebbing. The VN-Index for the main bourse in southern Vietnam had dropped from over 510 points in early June to less than 450 points yesterday, or a fall of over 10%. The index does not tell the full story though, as liquidity is more a problem to investors.

Sliding liquidity

The fever on bourse has these days given way to hesitation or a wait-and-see attitude, when many investors only go to the trading floor to see how the market fares.

In April and May, investors were excited with huge trading volumes on the stock market when many sessions witnessed a value of over three trillion dong. Many people opened new accounts at stock brokers to cash in on the rising bourse, thus leveraging up the market's liquidity. However, capital channels now seem to have dwindled as the trading volume has declined gradually over the past two weeks.

In the last week of June, the southern market's trading volume averaged out at 1.62 trillion dong a session, sliding by 27% from the week earlier, while the trading value in Hanoi market was an average 682 billion dong, falling by a third. The stagnation continued, though, when the southern market's turnover this Monday was only 1.1 trillion dong and that on Hanoi bourse totalled only 500 billion dong.

Many investors have complained of trading floors being deserted these days, while on online forums, many other investors advised themselves to "take a time off while waiting for new waves to surf:'

All accusing fingers are now pointing to the smaller cash flow, and behind the situation is a long story.

Banks tightening credits

Pham Do Chi, deputy general director of VinaCapital, observes that the capital flow seems to have been drained out of the market partly due to banks tightening consumer credits that are said to have been injected into portfolio investment over recent times.

Loans for consumers usually are not supervised tightly like funds for manufacturing and trading, and banks have boosted this lending channels as lenders can negotiate rates with borrowers, which are normally set higher than the ceiling of 10.5% per year capped by the central bank.

The central bank has recently hinted at tightening consumer credits, and the Governor one week ago made a concrete move by saying an investigation would be launched into this lending activity. While pending the investigation, all commercial banks are asked to make internal checks on their consumer credits and submit reports to the central bank before July 15.

Securities expert Le Dat Chi from the HCMC Economics University says that banks have also restricted credits for stock investment alongside a tougher hand on consumer credits. Lenders have recently hiked lending rate for this kind of loans and only accept mortgages being stocks having high liquidity, according to Chi. Bank for Investment and Development of Vietnam, for instance, has raised their lending rate for stock investment to 12% per year while the annual rate at Bank for Agriculture and Rural Development of Vietnam has also shot up to 14% from the previous 12%.

Stock brokers in same mood

The cash flow stagnation is further aggravated by a recent order from the State Securities Commission,' which in a dispatch asks securities companies to stop providing repo service for investors, thus choking off another important capital channel into the bourse.

Undercurrent practice, investors holding unlisted shares usually make repo contracts to get finance from brokers and put it into the listed market. Under a repo contract, an investor holding shares of an unlisted company can sell those unlisted shares at cheap price and commits to buy back those shares after a period of time. The difference in price when buying back shares is usually equal to banks' lending rates for the same term.

Truong Duy Khiem, director of Le Ngo Cat branch of ACB Securities Co, estimates that a high volume of capital from repo contracts has been pumped into the equity market. "There are about 100 securities companies in the market. If each broker uses five billion dong from their equity to offer this service, the total amounts to 500 billion dong. When the service is banned, this amount of money will be completely withdrawn from the capital market;' Khiem said.

As the market is in deep correction now, few investors want to take the risk of investing in the market by using capital borrowed from banks. Therefore, loans for stock investment has fallen sharply in recent days.

Le Van Minh, director of the HCMC branch of Agribank's securities company, says that credits for stock investment at Agribank made via his branch in May was 150 billion dong, but the figure has been halved now.

"Unclear trend of the market at this time has made investors to think twice when using loans for investment for fear that the market should fall further again like last year;' says Minh.

Dinh The Hien, an investment expert at Eximbank, forecasts that capital for the stock market will be further tightened after strong rallies over past weeks.

Funds, institutions, and even companies involved in financial investment may have attained the profit target by the middle this year so they have now become more cautious in investing again in the market, he explains, adding "from now to the middle of July, I think the stock market's liquidity will fall further:'

One fact repeated again and again in daily reports of brokers is the advise to investors to take caution given the unclear market trend and try to hold more cash instead. It is no wonder why the market has braced for an ebbing period.