Erratic stock market
Looking back over the last 15 years, from June 2008 up to now, the State Bank of Vietnam has reduced the operating interest rate 23 times. Right from the first trading session after the announcement the VN Index reacted to these interest rate cuts by recording twelve gaining sessions.
During the period from 2008 until 2011, the stock market faced many difficulties when inflation was very high at nearly 20 percent, forcing the State Bank of Vietnam to implement a tight monetary policy. Operating interest rates increased sharply in 2008, from 7.5 percent at the end of March to 15 percent in June and were maintained until October. Deposit rates also reached a very high threshold of up to 18.5 percent per year. At the same time, the operating interest rate fluctuated relatively high, causing instability in the commercial interest rate level, and increasing policy risks that caused the stock market to rise and fall erratically.
However, the VN Index still recorded a strong increase during the time when the State Bank of Vietnam continuously lowered the operating interest rate. In contrast, the market fell deeply during periods of increase in operating interest rates.
In the period from 2012 until 2014, inflation gradually decreased, creating favorable conditions for the State Bank of Vietnam to loosen monetary policy and sharply reduce the refinancing interest rate from 8.5 percent to 6.5 percent per year, leading to a similar decrease in commercial interest rates. At that time, the one-year deposit interest rate decreased from 14 percent at the beginning of 2012 to 6.8 percent at the end of 2014, equivalent to a decrease of 7.2 percent per year. During this period, the correlation between operating interest rates and the stock market was quite clear. The operating interest rate continuously decreased sharply and remained stable, driving the commercial interest rate down sharply and the stock market recorded an impressive increase.
Pandemic phase
The period between 2019 and 2021 is associated with the US-China trade war and the Covid-19 pandemic, which caused the global economy to decline. Monetary policy in most countries is loose through money injection and interest rate cuts to stimulate aggregate demand. Vietnam also sharply reduced the operating interest rate when the refinancing interest rate decreased from 6.25 percent per year at the beginning of 2019 to 4 percent per year by the end of 2021.
In particular, the interest rate on the interbank market has many times decreased to nearly zero percent. The impact of operating interest rates on the stock market was clearly shown during this period. Low interest rates are the main reason for the cash flow to shift to other investment channels, notably the stock market. VN Index increased spectacularly, surpassing the historical milestone of 1,500 points in 2021.
In 2022, when the world economy began to reopen, it increased the demand for goods, but resonating with the Russia-Ukraine conflict and the Chinese zero covid policy, which disrupted supply chains and pushed up global inflation. Monetary policy was tightened around the world. The correlation between operating interest rates and the stock market in 2022 is relatively close. The increase in operating interest rates was accompanied by continuous movements to attract money from the State Bank of Vietnam, which pushed the commercial interest rate up sharply. Rising interest rates attract cash flow from investment channels to savings, and cash flow out of the stock market and VN Index dropped to a record low in 2022.
Stock market positive
During the fifteen-year period of the stock market and the changes in the operating policies of the State Bank of Vietnam being closer to reality of the market, the correlation between the stock market and the adjustment of interest rates was reduced. The State Bank of Vietnam operating efficiency has now become clearer. In general, the operating interest rate decreases and remains for a long enough time, and the stock market often increases strongly and vice versa when the operating interest rate increases or lacks stability.
However, it seems that the above data has not been compatible with the stock market after three recent reductions in interest rates made by the State Bank of Vietnam. This difference, according to Vietinbank Securities (CTS), by the State Bank of Vietnam has not had much impact on the market because the decline is not much and the time is not long enough, while the commercial interest rate level is still high.
In particular, the stock market in this period was under pressure from many factors outside monetary policy, including difficulties faced by businesses in the real estate market and consumer lending. Therefore, the reduction of the operating interest rate needs to be maintained for a long time with a stronger reduction for the impact on the new stock market to be clear. However, there is a good fact that the overall macro is stable and can be maintained for the rest of 2023. Next is the decreasing trend of inflation and a stable exchange rate, creating huge room for investors. However, the State Bank of Vietnam continued to reduce the operating interest rate further.
With the above analysis, CTS believes that the stock market will be more positive in the second half of 2023. Accordingly, the VN Index may increase more after about 3 to 7 months since the announcement of the latest interest rate reduction was released on 23 May. The securities company also forecasts that deposit and lending interest rates in Market 1 are forecast to decrease in proportion to the decrease in operating interest rates, possibly by another 0.5 percent in the second half of 2023.
Accordingly, a one-year term applicable to individual deposits is forecast to remain at 7 to 8 percent per year, equivalent to a one-year term deposit P/E of 12.5-14x. Currently, the stock market P/E is around 10-11x and in an uptrend. Therefore, it is expected that the market P/E can be at least equal to the P/E of deposits, which means that the VN Index is expected to increase by about 25 to 30 percent in 2023 with a possible delay to the first quarter of 2024.
High interest rates of above 10 percent have appeared since November 2022. The six-month term deposits during that period are now maturing. In the context that deposit returns at banks have begun to fall deeply, while investment channels are warming up on the stock market in the last one-month, foreign investors have continuously sold strongly, but VN Index did not decrease too much. On the other hand, the transaction volume of the individual block increased. This shows that the cash flow after closing the savings book has begun to find this as an investment channel. The cash flow is forecast to be even stronger when there is more cash flow from savings deposits of nine months, twelve months, and thirteen months of maturity.
