Vietnam stock market indicates significant risks, volatility: SGI Capital

Vietnam’s stock market currently poses significant risks and high volatility with relatively few clear-cut investment opportunities, says fund management company SGI Capital.

The broker says in a report that the global market is in a transitional phase between optimism driven by economic growth and the U.S. Federal Reserve's (Fed) anticipated interest rate cuts and concerns about recession. The decrease in new jobs and the increase in layoffs last month continue to reinforce the rising unemployment trend.

At the end of each long growth cycle, the economy usually transitions from strong growth to slowing growth and ends with a recession. Major economies like the U.S., China, and the EU are experiencing a slowdown, and the risk of recession has gradually increased over the past few months, the report says.

Moreover, this recession risk is clearly reflected in the bond and commodity markets (such as oil and steel), while the U.S. stock and corporate bond markets are not yet prepared for this risk, the report adds, citing Bloomberg.

SGI Capital notes that during the pre-recession phase, interest rates usually decline and even decrease significantly, but cash flows tend to avoid risky assets and flow into safe havens like gold and bonds.

After years of focusing on high-risk assets like stocks, corporate bonds, real estate, and cryptocurrencies, a recession is a large enough risk to trigger a significant reversal of capital flows away from such assets. The priority will shift towards preserving capital and reducing financial leverage, as not losing money is already a significant achievement during a recession.

"With the increasing prevalence of high-leverage financial instruments, the downward spiral, when it occurs, can lead to rapid and severe sell-offs beyond normal fluctuations. In early August, the Japanese stock market fell 20% in just three sessions due to a ‘margin call’ triggered by investors borrowing yen to buy stocks. The process of reducing financial leverage during a recession can create similar strong volatility across various asset classes," the SGI Capital report says.

It says that the stock market always looks ahead and reflects expectations for the next 6-12 months of economic growth and corporate earnings. This, aside from significant domestic management efforts, heavily depends on the international context, which is becoming less optimistic.

If the global economy enters a recession in 2025, it will significantly impact Vietnam's growth rate and the trend of investment flows in the coming months.

Recent positive macroeconomic information in Vietnam no longer affects market liquidity, the report says. Foreign investors have slowed down, but are still persisting with net selling whenever the VN-Index, representing the Ho Chi Minh Stock Exchange (HoSE), approaches the 1,300-point territory.

Domestic cash flow has not increased and is under pressure due to recent large share and bond issuances by securities and real estate groups.

Furthermore, investment focus in the two recent quarters has shifted to the real estate market. As a result, trading volume on the Ho Chi Minh Stock Exchange (HoSE) dropped by 30% in August compared to March-April, even though the VN-Index remained at similar levels.

SGI Capital notes that the Vietnamese stock market has never maintained an upward trend with significantly reduced liquidity.

This year, pressure from bond maturities at the end of the year poses a liquidity burden for many large issuers, including listed companies. SGI Capital believes that there is no sign of improvement in liquidity and capital flows in the coming months, with risks potentially increasing, especially due to strong fluctuations in global markets.

"In investing, the important goal is to find and select opportunities with low risk and high returns. The current environment carries significant risks and volatility, with relatively few clear opportunities. When risks become fully apparent and reflected in the market and stock prices in the near future, having available capital and ample liquidity could provide a significant advantage," the report notes.