There were efforts to find solutions, but history has shown that administrative measures have no effect but can only make the situation worse. The stock market can only balance itself when the stock prices fall sufficiently to match available capital in the market, after which the market will self-regulate.
Lien release
Most individual investors are familiar with the term ‘mortgage lien release’ if they have ever used margin and the price of collateral which is a stock that falls below the permissible threshold. Currently, the market is plunging not because of ‘cross-mortgage lien release’. The concept of ‘cross mortgage lien release’ is less well known, but it is not new. During the 2008 recession period, liquidity in the banking system had dried up due to high-interest rates, and the State Bank of Vietnam issued compulsory bills to attract money to control inflation. So many business owners were also disbursed on a large scale and related investment portfolios were also sold.
The current situation is similar to that of the 2008 crisis, with interest rates very high and credit room exhausted, while businesses still need cash quite desperately. The only difference is that the shock in the corporate bonds market has occurred at the present time, making the demand for cash even higher. Hundreds of trillions of dong worth of bonds are coming into maturity, along with pressure to buy back bonds before maturity.
This has increased the demand for more liquidity. Indebted businesses only have to sell the easiest asset for cash, which are investment shares or shares of their own businesses. A perfect storm is then triggered, when a large number of shares are sold by mortgage holders, causing the price to drop even further and trigger the ‘normal-mortgage lien release’. This pressure is so great that it affects other investor portfolios in the market that use margins.
Just as in 2008, ‘mortgage lien release’ sales transactions are technical, so they cannot be measured by fundamentals. Questioning the reasons behind the stock prices falling while GDP is strong or why stocks that are already very cheap still sell is meaningless. Since the core of this type of transaction is to sell for money, all other factors do not matter. It can be seen that the basic valuation coefficient of the Vietnamese stock market is P/E continuously falling, but the market still does not stop falling.
At the beginning of April 2022, when the VN Index peaked at 1,500 points, the P/E was only 17.6 times, which was not expensive, and that is why many analysts forecast the index will still reach 1,800 points. After having impressive second quarter business results, the market recovered slightly, but P/E was at the peak by about 13.7 times and then decreased again. In the third quarter, most businesses were still profitable, but the market continued to fall and by the end of the week, P/E was only 9.5 times, which is incredibly cheap.
The market wreaks havoc on many portfolios, but it also sets the stage for self-balancing. Because the amount of cash that had exited the market was so large, the purchasing power was greatly reduced. Demand has been weak, and the only opportunity to balance is that the supply must also be weak, which means the stock market price must be very low to match. For instance, in the record liquidity session on 16 November, more than 1.2 billion shares were traded on the whole market, but the total value was just over VND 16,000 bln, while the same amount in April traded at around VND 40,000 bln.
A good consequence of the ‘cross-mortgage lien release’ operation is that a lot of stocks that have nothing to do with corporate bonds or the owners who are stuck in liquidity, also decrease in value. Market forces will look to that attraction to pour money into buying. So, it is greed that will save the market without any administrative action.
Massive foreign capital
A sign of greed is that foreign capital flow through ETFs is still pouring into Vietnam. It was a surprising phenomenon that Vietnam's stock market fell the most in the world while the economy was the best in the world. ETFs to attract capital must have a reason to convince shareholders such as cheap valuation, good corporate profits, and stable macro.
Statistics on HoSE from 3 November to now show the total net buying value of foreign investors is about VND 7,914 bln, of which VND 7,494 bln is poured into shares. Foreign investors maintained the buying proportion, accounting for 28% to 35% of the total transactions on this floor each day. This is an exceptionally high proportion when compared to the 10-month average of only 8.15%.
While domestic ETFs were heavily withdrawn in September 2022, the period of liquidity pressure began to be clearly noticed. Two funds managed by Dragon Capital, VFMVN Diamond ETF and VFM VN30 ETF, withdrew nearly VND 441 bln, causing this fund to sell a series of stocks such as MBB, ACB, VPB, TCB, REE, FPT, MWG, creating more downward pressure. It is not excluded that this is also the effect of needing cash liquidity of shareholders contributing to this fund.
In the opposite direction, foreign ETFs still attract money, especially the Fubon FTSE Vietnam ETF from Taiwan. Only from the beginning of November until now, this fund has attracted an additional VND 2,240.5 bln. ETF capital flow started pouring back into Vietnam's stock market from the beginning of October with about VND 2,111.5 bln through foreign funds and VND 1,971.3 bln through domestic funds. Particularly in the first half of November 2022, the total capital inflow through ETFs is about VND 3,997.8 bln. This movement contrasts with the strong downward trend of the Vietnam stock market, but it is reasonable, because the lower the price, the better buying opportunity for people with money.
