Market Update - This month Fitch downgraded Vietnams debt rating to B+ with a stable outlook from BB- citing inconsistent government policy, low foreign exchange reserves and a weak banking system. The move came as a surprise to many commentators who looked at Vietnams ever improving macro condition as reason for optimism. We also share this opinion, as the move was somewhat unjustified and does not reflect the efforts of the government in stabilizing the macro environment and the countrys currently improving key macroeconomic indicators. VAM_Monthly_Newsletter_Jul_2010
In July, industrial production and retail sales were up 13.5% and 26.4% year on year respectively. Although year to date up 17.5% when comparing to the same period last year, export turnover this month declined 8.8% MoM as subdued European demand made its impact which contributed to Julys monthly trade deficit of $1.15bn or $7.4bn year to date, equivalent to 19.4% of export turnover. However, capital inflows can adequately compensate the deficit with FDI disbursement being recorded at $6.4bn year to date and overseas remittances showing an increase of 24.5% year on year in the 1H 2010, achieving $3,9bn. It should also be noted that ODA flows and external borrowings have not yet been taken into account.
Foreign reserves are expected to increase by $2bn to $17bn by the end of this year. Credit growth for the first 7 months was 12.97% highlighting the importance of recent reductions in bank lending rates in realizing the governments effort to achieve its target of 25% for the year. Continued low inflation has also given the government room to increase the money supply in order to push lending rates lower.
The VN-Index continued its sideways path during the month as mixed second quarter earnings failed to support a change in stagnant retail sentiment. However, the downgrade did prompt net buying from foreign investors to decline towards the end of the month. The VN-Index closed the month at 493.91 or a decrease of 2.61% MoM.
Our View – By end of July, most corporates have disclosed their 2Q 2010 earnings results which have been quite mixed with consumer sector looking good while property and materials sectors seeming weak. Despite first half year business results being in line with expectations and macro economy experiencing positive signals in the month, they were not supporting enough to drive the bourses upwards as investors remained skeptical about new capital flows injected into economy via credit growth policies.
For August, we expect the markets movement to be mainly driven by factors such as selling pressure, investors confidence and a break-through in easing monetary policies of the State Bank of Vietnam (SBV). Concerns on the oversupply of shares in the market (particularly from banks in order to meet the minimum charter capital requirements) will also create a lot of pressures on the VN-Index. As the market has followed a bearish trend recently, specific and comprehensive actions from the SBV via credit growth policies will be an important catalyst in bringing back investors confidence.
Currently, we still uphold our interests in telecommunication, oil & petrochemical, dairy product, pharmaceuticals and banks. Moreover, we will be continually keeping an eye on news on the global economy and monthly government meetings to closely observe the trend of macro and monetary policies in the near term.
Source: VAM, 08.08.2010
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