Profit potential and market risks
The market recently experienced a significant sell-off towards the end of July and into August, leading to a 12-month record in liquidity. While concerns about speculative trading in fundamentally weak stocks were raised during the strong uptrend, the market continued to be influenced by aggressive trading behavior.
On one hand, the considerable rise in stock prices offers promising profit opportunities for investors. However, it's important to note that these profits remain theoretical until the stocks are sold and converted into cash. Conversely, the higher the stock prices climb, the greater the risk for those who buy in later, as a market reversal could result in losses for those who purchased at elevated prices. This dynamic illustrates the zero-sum nature of short-term speculative trading, where gains for some entail losses for others.
Preliminary statistics for stocks in the VNAllshares basket on HoSE reveal that while the VN-Index has increased by only 16.5% during the wave from May to July, around 35% of stocks have gained over 30%. Accounting for the maximum potential increase during this period, approximately 52% of stocks have witnessed growth exceeding 30%. These percentages reflect an exceptionally high level of performance for a 3-month bull run. To provide context, during the most exuberant phase of the uptrend in the fourth quarter of 2021, only 58% of stocks in this basket increased by more than 30%. In essence, a true "stock party" unfolded between May and July.
Realistic assessment
While very few investors manage to buy at stock market bottoms and sell at peaks to fully capitalize on these robust price increases, the statistics confirm a remarkably strong upward momentum. The question, however, remains whether this surge is rational. The answer lies in the absence of a steadfast criterion for rationality, as psychological factors combined with substantial cash flow can trigger irrational movements in the stock market, often resulting in what may seem like "crazy" behavior.
As of now, the majority of crucial results for the second quarter of 2023 have been released. Numerous data points have become intertwined with stock price increases, even for businesses that continue to operate at a loss. According to VNDirect Securities' estimates, which cover 92% of market capitalization, second-quarter profits for 2023 decreased by 11.7% compared to the same period last year. Another estimate from FiinTrade, encompassing 87% of market capitalization, indicates a total after-tax profit decline of 18.6% over the same period.
While the banking sector is anticipated to report weaker performance, the after-tax profits of 25 out of 27 banks decreased by 1.3% compared to the same period last year and dropped by 4.4% compared to the first quarter of 2023. Notably, provisions for credit risks surged by 38.5% over the same period and increased by 3.3% from the first quarter of 2023. Non-financial businesses experienced a 36.9% decline in profits, and the real estate sector, excluding VHM and KBC, saw after-tax profits decrease by 37.8% over the same period.
While the ratio could change when all businesses disclose their results, the undeniable fact remains that business performance in the second quarter was rather lackluster. Not all businesses demonstrated growth or recovery in profits compared to the first quarter of 2023, signifying that overly optimistic expectations are being tempered by reality.
Balancing needed
The reduction in savings interest rates has led to a significant influx of funds into the stock market, a trend observed over the past three months. The combined trading volume on HoSE and HNX has risen from an average of around VND 12,161 billion per session in May 2023 to an average of VND 18,299 billion per session in July. Particularly noteworthy are the four consecutive sessions from July 27 to August 1, during which the average matched value reached VND 24,215 billion per session. On August 1, liquidity soared to VND 27,521 billion across both exchanges.
Both domestic and foreign financial institutions predict a high likelihood of further reductions in deposit interest rates during the third quarter of the year, marking the fifth such reduction in 2023. This anticipated action is expected to establish a stable cycle of monetary easing, providing a highly favorable foundation for cash flow in the stock market and ensuring a sustained opportunity for liquidity in the long term.
However, short-term cash flow dynamics may not align with this long-term perspective. The use of financial leverage for speculative purposes can lead to fluctuations in capital flows on a daily, weekly, and even monthly basis. Investor behavior, influenced by the desire to secure profits and reduce leverage, can lead to decreased purchasing power. Rapid spikes in stock prices can create temporary barriers to short-term capital inflows due to a weakening buying currency, and apprehensive investors may refrain from re-entering the market at elevated prices after securing profits.
