Market makes sudden correction after hot growth

Saigon Investment
(Saigon Investment) - During the months when the Covid-19 pandemic brought the world to a near standstill, the most attractive and vibrant investment channel was the stock market. However, because the market is now too hot, investors are easily stunned when the market corrects strongly and suddenly, like it did in the last session on 19 January.

Illustrative photo.

Illustrative photo.

In 2020, the VN Index increased by 14.86%, the highest increase in three years since 2018, helping many investors profit in the fourth quarter of 2020. This drew in more and more new investors who opened accounts and transferred money into stocks. In 2020, the average transaction value per session was around VND 7,000 bn, double of what it was in 2019. In the early sessions of 2021, the trading value continued to increase strongly in sessions from VND 15,000 bn to VND 20,000 bn. A large amount of money poured into the market, and analysts forecast that the VN Index would easily conquer the 1,300 mark in the first quarter.

The continued increase of the VN Index made investors afraid that the stock market would form a bubble, like it did in 2007, by decreasing sharply. This fear was also brought about partly after an unexpected terrifying drop on 19 January. In this adjustment session, all stocks, good or bad, fell into a state of sell-off, and many investors were concerned that the market would enter a stage of plunge after reaching peak. However, in session on 19 January, there was no sign of the market falling into the state it did in 2007. Firstly, the VN Index increased strongly but failed to surpass the peak of 1,200 points. Secondly, the P/E of the current market was about 18.5-19x, which is quite high compared to the beginning of the year, but still lower than 22x, as in 2018.

It can be easily seen that with the hot growth of the market in a short span of time the prices of almost all listed shares increased sharply compared to the price at the beginning of 2020. Many of these shares increased 300% to 500%. This increase is supposed to exceed the fair value of the business. This also causes the P/E of the market to rise from a low 11x in April 2020 to 20x in early 2021. This P/E level is already higher than in 2019 in Vietnam and other countries in the region. We know that 2019 was a prosperous economic year, not affected by the Covid-19 pandemic.

Besides hot growth, the market has an alarming situation where many investors are participating in investment by mere surfing. This is risky because many investors accept to buy at a high price to sell again at an even higher price, without analyzing. This is the reason why the stock price pushed up. Consequently, it will be difficult for the stock price to increase in the near future. Especially when the market corrects, many new investors and those who use a high margin will have to sell. This has accidentally created a wave of sell-off similar to the session on 19 January, causing the market to fall into a precarious situation.

The market has risen too hot in a short span of time based on cash flow surfing to seek fast profits, and many stocks have risen beyond reasonable level. Therefore, the market making strong corrections lately is very normal.
However, the above forecast is just a less positive hypothesis, but the reality is not so pessimistic. We can take evidence comparing the market situation in 2007 with the present time. If in 2007 the market strongly depended on foreign capital flow, now the market still hasn't decreased as the main source are domestic investors. In addition, Vietnam's GDP is currently about USD 270 bn, nearly four times higher than in 2007. Listed companies have a turnover of tens of trillion dong and profit of about VND 1,000 bn, compared to previous revenue of some hundred billion dongs. The size of GDP and the size of the listed firms are also the factors behind the market. Therefore, the market in 2021 will be more positive than in 2020.

To summarize the situation, along with an optimistic outlook of the Vietnamese economy for 2021, the stock market is forecast to develop strongly. The market has risen too hot in a short span of time based on cash flow surfing to seek fast profits, and many stocks have risen beyond reasonable level. Therefore, the market making strong corrections lately is very normal. Even when looking at the positive aspect, the session on 19 January can be seen as a strong correction for a positive recovery. Investors can buy good fundamental shares that are falling deeply or have reached the threshold.

Dr. Dinh The Hien

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