The speakers during the talkshow. Screenshot

After hitting a low point in March and April last year, Việt Nam’s stock market has surged and has continuously recorded new historical highs.

On Monday, the benchmark VN-Index hit a new record of 1,400 points, the highest since the stock market was established in 2020, and continues to set new peaks.

The development has caused some market participants and experts to worry about a market bubble.

During the “Macro-economy and the stock market” talkshow, held by Kinh tế và Dự báo magazine on Tuesday, Nguyễn Trí Hiếu, finance and banking expert; Cấn Văn Lực, chief economist of the Bank for Investment and Development of Việt Nam; Nguyễn Sơn, chairman of the State Securities Commission's Việt Nam Security Depository; Võ Trí Thành, director of the Institute for Brand and Competitiveness Strategy, discussed the issue and macro-economic factors that influenced the stock market in the second half of 2021.

Do you think the stock market is in a bubble?

Sơn: The market growth was a phenomenon last year and the first six months of this year with stock indices at 20-year high levels, while the market liquidity in some sessions reached US$1.5 billion. The rallies are in line with our containment of the pandemic in 2020 and first months of 2021, and economic growth which was lower than expected but higher compared to other economies in the region.

Current capital flows are quite abundant, with relatively low interest rates. And this will last until the end of the year and beyond. The US Federal Reserve (Fed)'s signal is not to raise the basic interest rate until the end of 2023, meaning that the State Bank of Việt Nam will also keep the interest rate unchanged for a while longer.

And that helps keep a steady level of low interest capital to flow into many sectors of the market.

The loan balance for securities activities of the whole banking system is low. And the margin lending managed by the State Securities Commission of Việt Nam (SSC) is also under control. So I don’t think there is a bubble in the stock market.

Hiếu: I take a more cautious approach to the market’s outlook. Even when many businesses have been heavily affected by COVID-19, the market benchmark still soared from 600 – 700 points to 1,100 points, 1,200 points then 1,300 points and currently 1,400 points. 

There are some factors we have to look through. In the banking system, while credit growth is high at 5.1 per cent in the first five months, capital growth is low, meaning many people pour money into the stock market and real estate. It also receives support from the low interest rate. And while the number of investors has surged, they are individual and unprofessional investors.

The US market is also trading at an all time high, but its growth is much slower with Dow Jones Index gaining around 30 per cent over the year. Meanwhile, the VN-Index had rose up to 200 per cent. This growth is too high. So to me, there is a possibility of a bubble in the stock market.

Is there any relation between macro-economic factors and the stock market?

Lực: There is a strong bond between macro-economics factors and the stock market. The stock market is a crucial capital channel for the economy. Over the past 10 years, in 2015, the market only contributed 13 – 14 per cent of total social funds for development and investment. But at the moment, it accounts for around 20 per cent.

It has become an important investment channel for enterprises and citizens, especially during the pandemic.

A recent study by the Citi Research team showed that if inflation in the US is around 1 – 3 per cent, it is the best threshold for the price-to-earnings ration (PE) in the stock market.

In the US, when inflation is at this level, the PE reaches 18x. If inflation is too high, like around 5 – 8 per cent, the PE will only be 10 - 12x. Therefore, if inflation rises, it will negatively affect the development prospects of the stock market.

In Việt Nam, the economic growth was 6.61 per cent in the second quarter, according to the data from the General Statistics Office of Việt Nam.

As of the end of June, the economy grew 5.64 per cent, lower than the forecast of the Ministry of Planning and Investment, but quite similar to our expectation at the beginning of June with a growth of 5.5 per cent for the first six months.

Regarding inflation, we forecast an increase of 1.8 – 2 per cent during this period. We will wait for official data from the General Statistics Office. In the first five months, inflation is only at 1.29 per cent, so we think it is increasing relatively strongly.

The Fed recently changed in its stance over financial policies. Can it affect Việt Nam’s stock market?

Hiếu: Since the outbreak of COVID-19 last year, the US government has issued stimulus packages, from over $2 trillion during Trump’s administration to $1.9 trillion in President Biden’s administration, pumping a huge amount of money into the market. And it caused rising inflation.

As the pandemic has been contained in the US, the economy is on track to recover. So the central bank suggested that it may increase interest rates to 0.6 per cent before the end of 2023. However, I think inflation will start to rise from now.

If the Fed raises interest rates to tame inflation, the State Bank of Việt Nam (SBV) may also increase rates as well. With rising materials costs, from steel to oil, local products also get higher gradually. Therefore, inflation is likely to rise this year. Higher interest rate results in lower stock price, and vice versa.

Thành: In my opinion, the chance of rising interest rates in Việt Nam is low as the inflation has increased, but is still at a controllable level. In addition, the Government will continue support policies like low rates as many factories and manufacturing industries are hit hard by the current fourth wave of COVID-19.

Of course, if the economy recovers strong enough to the level that concerns the policy makers, then the central bank might raise the rate.

And I think raising the rate is the last thing the Fed will do if they want to control rising inflation. It will firstly taper its asset purchase programme. — VNS