Value of stock
Determining the approximate time to enter the market is the dream of all investors in the world, and no one is sure if they can be absolutely accurate on this. However, this is only when investors want to always win in short-term trading. For long-term investors, it is not a big deal when fluctuations go up and down for a few days, or a few weeks, as long as they know that the shares held have guaranteed value in the future and will continue to grow. In the long term, it is the value of the stock or the market in general that determines the trend.
The short-term speculative view is to bet that someone else will buy back your shares at a higher price, while the long-term view is to bet that the business will continue to grow and distribute good profits to shareholders. If you understand this, the line between right and wrong turns out to be a move towards the cautious. Many speculators understand the market differently than an investor. In most cases it is like a drug, whose effect lies in the way it is used, not the drug itself.
When the stock market plunged in May, panic spread, and many investment funds, even some of the biggest funds in Vietnam, considered it an opportunity to buy. After each analysis and recommendation, the stock or the market continued to decrease for more weeks. True or false assessment of any analyzes depends on the short-term or the long-term perspective.
For instance, when evaluating the market based on the P/E ratio, it is clear that the market is extremely attractive right now. P/E of VN Index at the end of June 2022 was only around 13 times, while three months ago it was over 17 times. Hundreds of shares from a P/E of 20 times have decreased to 10 to 13 times, some even less than 10 times. Although production and business activities are still profitable, profit growth is still guaranteed. From the eyes of long-term investors, this is really cheap valuation, but for speculators, P/E doesn't mean anything when there are still investors selling off, so that stock is still expensive.
Light at end of tunnel
One factor that has been talked about a lot these days is liquidity. Daily trading is dropping to shocking levels. In some sessions, HoSE and HNX traded a total of less than VND 10,000 bln. Compared to the level of VND 30,000 to VND 40,000 bn at the peak, this is an unimaginable low level of liquidity.
However, the biggest difference in this extraordinary liquidity gap is less noticeable. When the liquidity is extremely large, the market cannot go any higher, and when the liquidity is extremely small, the market cannot decrease further but recovers. Therefore, there is apparent greed in the eyes of many people at a time of extreme liquidity, but there is also fear in many others. On the contrary, at this time when the liquidity is extremely small, there is no fear. If you look at the market from the perspective of psychological rotation from greed to fear and vice versa, this is like the light at the end of the tunnel in the current downtrend.
Going back to the most basic market valuation method is the P/E ratio. The view that the market is cheap has its own reasons. When looking at the past, with each release of financial statements, when corporate profits increase, the P/E ratio will decrease, thereby contributing to lowering the overall P/E level of the whole market. This means that at this point in the event the market does not move higher, and the growth in the second quarter of 2022 business results will reduce P/E much lower than 13 times. Good second quarter earnings will drive down P/E if stock prices don't rise. This is the so-called cheap factor.
The fact that investing is based on fundamentals can be deduced from simple logic. For example, strong consumption growth visible through publicly available figures will support commercial businesses to perform better. The demand for travel and tourism is congesting the airports, so the businesses involved are bound to benefit. Industrial production increasing capacity is driving energy demand now. The only thing more difficult is that investors have to find businesses that benefit from this simple change, but stocks sell-off because of greed.
An interesting convergence at the moment, is the start of the second quarter financial reporting season and the time when the June macro data has just been released, alleviating concerns about inflation pressure. The CPI increase in June is only 3.18% compared to the end of last year, and it is highly likely that it is not out of the plan when the main pressure is still on gasoline prices, a field that still has room for policy control.
