For nearly two years the VN-Index has remained over 1,000 points, but the fall this time indicates a shortage of capital which will prove to be a heavy burden for the stock market as indications are that huge marginal capital has flowed to major shareholders.
Financial statements of securities companies for the third quarter have left investors totally bewildered. Tens of trillions of Vietnamese dongs remained in big accounts with the marginal 160 to 170 trillion dong available for lending by late September 2022. However, market liquidity has been in decline, with share prices and VN-Index falling dramatically. With current shares at an all-time low, it is extremely hard to understand why huge amounts of cash have remained unused in big accounts.
After a series of losses for several consecutive weeks, individual investors find it very difficult to refer to margins to catch bottom. If they could, the evaporated value of their mortgaged assets would considerably reduce their borrowing capacity. Therefore, it is possible that securities companies are lending mortgages with very large accounts and valuing mortgaged assets at very low levels, because the dark side of this operation is known only to securities companies. Large accounts with tens or even hundreds of millions of shares can only belong to major shareholders and business owners.
Previously, such a large number of shares belonging to major shareholders were often pledged at banks. With the tightening of credit, however, banks are now looking for money sources and having to raise deposit interest rates. Meanwhile, several times of capital raising have enabled many securities companies to significantly increase the size of their capital, even equal to the capital at some banks. Many securities companies can also borrow cheap capital from foreign partners. In short, the lending capacity of securities companies is already very large while the lending rules are not as tight as those at banks. As a result, it is normal and perfectly understandable that business owners or large shareholders tend to rely on this lending channel.
If this capital business really does take place on such a scale, there is no contradiction between the figures mentioned above. This is to say that such a large amount of borrowed money is not really moving in the stock market but is actually flowing in other channels to satisfy other needs. How much the risk of these loans affects the stock market is a challenging question. The valuation of a collateral is the decisive factor because it is customary for the value of the collateral to fall below a specified threshold before it is required to add more collateral or disburse in order to recover debts. However, there have also been situations where the mortgaged shares of business owners have been sold off, and that is often a very large transaction size regarding particular stocks.
Decrease in transactions
The size of daily transactions has decreased drastically and the question is where has the money evaporated, because large amounts of cash is probably still available in the market. Preliminary statistics from SCs’ financial statements show cash balances in customer accounts worth about VND 60,000 mln to VND 70,000 bln. It is also likely that more capital is borrowed to increase the purchasing power.
It is true that many investors find it hard to explain why economic growth and corporate profits is high, but the stock market is declining. However, if we look at the sign of liquidity in the banking system, we can easily feel the high risks. Many SCs, especially those backed by their parent banks, are tempting investors to put their deposits in securities accounts for daily interest rates of 8% per year, and weekly interest rates of up to 10% per year. That is a sign of fierce competition for capital when deposit interest rates have repeatedly increased considerably over the last few weeks.
The State Bank of Vietnam made a sudden move to raise interest rates on 24 October, just a few weeks before the FED meeting. Economic theories all say that a high inflation rate causes the value of money to decrease, and cash should not be kept, yet reality shows that it is the cash that is the king now. No assets are as flexible as cash, and only cash can satisfy the thirst for liquidity. Due to lack of cash, other types of highly liquid assets such as new stocks were sold off or mortgaged on a large scale, and then easily disbursed.
Therefore, the falling stock market is not simply an investment or valuation story. Instead, it is a story of a major asset restructuring. This is particularly important at a time when very large numbers of corporate bonds are maturing while the ability to issue new bonds to pay the debts is blocked and the borrowed money has been used for other purposes. VCBS estimates around VND 85 trillion of corporate bonds will mature in the fourth quarter of 2022, while VNDS believes the number of private bonds to mature will be worth about VND 58,840 billion. These are mainly bonds issued by banks, real estate corporations and multi-industry corporations.
If there is no newly mobilized capital for maturing debts, the pressure of corporate bonds maturing in 2023 will be even greater. This indicates that the liquidity thirst will be difficult to quench next year, even if the credit room is renewed. The stock market is therefore subject to not only competition for money, but also money withdrawal. This pressure is more critical than the Price to Earning (P/E) ratio.