Fed cuts, rising reserves bullish for Vietnam share prices

by finandlife26/07/2019 07:28

 

Vietnam state media recently reported that the country’s foreign reserves hit a record high of $68 billion at the end of June, up from the previously reported level of $65.5 billion, as strong FDI coupled with a moderate trade surplus bring currency into the country. This has several implications for interest rates and the currency and is a very bullish indicator for equity market valuations.

The Vietnam government has historically used F/X reserves as a key tool for controlling the value of the dong. In times of stress on the currency, the government has sold off reserves to defend it. From April to year-end 2018, the reserves were reported to decline from $64 billion to $57.5 billion as the value of the US dollar soared globally. Conversely, it has purchased reserves when markets are strong, which has served to keep the dong from strengthening against the USD at such times. This practice could get Vietnam in trouble as a currency manipulator except that rating agencies and supranational financial organizations have stated that Vietnam’s reserves are not yet adequate and need to be built up towards 12 months of imports (an argument with which we disagree because of the structure of Vietnam’s trading relationships).

As the government purchases reserves, it seems to increase liquidity in the banks – who are the largest purchasers of government bonds. Hence, we tend to see falling government bond yields at the same time.

Since the beginning of 2017, there has been a strong inverse correlation between the value of the DXY dollar index and the P/E ratio of the VN-Index. As the US dollar was falling in 2017, Vietnamese equity valuations rose to a peak of 22.5x trailing EPS for the VN-Index in early April 2018. Then as the dollar rebounded through the remainder of 2018, Vietnamese equity valuations fell. The correlation has weakened a somewhat in 2019 but this is because the euro, which makes up a large portion of the DXY, has also been weak so that the DXY has not been a good measure of the strength of the US dollar globally.

It’s clear that the correlation is continuing to boost Vietnamese equity valuations. As the US Fed increased the likelihood of multiple cuts this year, Vietnamese shares have risen. Since bottoming on June 27 at 943, the VN-Index has rising 4.8% through July 24. Implications for continued strength are therefore very positive.

Barry Weisblatt

Tags:

Economics

DISCLAIMER

I am currently serving as an Investment Manager at Vietcap Securities JSC, leveraging 16 years of experience in investment analysis. My journey began as a junior analyst at a fund in 2007, allowing me to cultivate a profound understanding of Vietnam's macroeconomics, conduct meticulous equity research, and actively pursue lucrative investment opportunities. Furthermore, I hold the position of Head of Derivatives, equipped with extensive knowledge and expertise in derivatives, ETFs, and CWs.

 

To document my insights and share personal perspectives, I maintain a private blog where I store valuable information. However, it is essential to acknowledge that the content provided on my blog is solely based on my own opinions and does not carry a guarantee of certainty. Consequently, I cannot assume responsibility for any trading or investing activities carried out based on the information shared. Nonetheless, I wholeheartedly welcome any questions or inquiries you may have. You can contact me via email at thuong.huynhngoc@gmail.com.

 

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