The VN-Index reached a high point in the first half of the year and surpassed the peak of 1,400 points in early July, but since then, the stock market has plummeted. The pandemic is considered the main reason for this reduction, and the market recovery is dependent on the control of Covid-19 in localities, especially key provinces for economic development.

The stock market is witnessing the rise and fall of VN-Index. Source: Internet

VN-Index plunges

Contrary to the movements of the world stock market, in the first half of July, the stock market suddenly dropped sharply. Previously, VN-Index was at 1,420 points (on July 5) before falling sharply in the first week of this month. The VN-Index has dropped to the lowest level of 1,225 points and then recovered at 1,290 points before falling back to 1,268 points. Compared to when the VN-Index was at its highest level, the index has decreased by nearly 200 points, equivalent to 15% of the market value.

According to Viet Capital Securities Company (VCSC), the market correction took place on a large scale, in all segments from small, medium to large capitalisation, leading to a decline of all indexes from VNI, VN30, HNX-Index, VNMidcap and VNSmallcap.

Experts pointed out the causes leading to this phenomenon. Accordingly, the pandemic continues to be complicated, especially in HCM City, leading to the application of tightened social distancing by the Government. This might affect Vietnam's economic growth in the second half of the year compared to initial expectations, which had caused a strong impact on investor sentiment.

Nguyen The Minh, Research Director of Individual Customer Division, Yuanta Securities Vietnam, said if the pandemic outbreaks occurred in a few areas like before and not affected seriously on HCM City, this time would be completely different.

“This outbreak has created concerns about the impact on GDP growth in 2021. Basically, this is the main cause. The second reason is the liquidity of the current stock market depends greatly on the proportion of individual investors who trade in the market every day, which currently accounts for about 80-90% of the market's liquidity. Accordingly, the market is greatly affected by the psychology of individual domestic investors, while the psychology of individual investors is more easily impacted than investors of organisation or foreign investors,” Nguyen The Minh analysed.

The market will recover quickly when the pandemic is under control

Other reasons also contributed to the strong decline of the market, such as the margin factor of the market. Since the beginning of the year until now, the market's margin is very high, up to more than VND 110 trillion, most securities companies have full margins while not having time to increase charter capital, therefore, the time of fall of the stock market is partly affected by this factor. Besides that, as of June, the Price to Earning ratio (P/E) of the market is about 18, so the market is no longer attractive compared to the previous period. In other words, the risk of the market also rising and the new cash flow of investors participating in the market will slow when investors hesitate to disburse.

Forecasting the stock market from now until the end of the year, Nguyen The Minh said it was impossible to predict exactly how long the pandemic would last, but two possible scenarios could happen.

The first scenario is if the pandemic could be controlled in August, the GDP growth would be expected to be kept at above 6%. With this result, the VN-Index could reach the expected target around 1,450 to 1,500 points.

In the second scenario, if the country can’t control the pandemic in August and it is prolonged to the end of the third quarter, the situation could stabilise again from October, the economy might be affected heavily and economic growth might only reach 5.5%. In this scenario, the VN-Index could reach the highest level at the old peak of 1,420 points. The stock market scenarios all depend on control of the pandemic.

On the other hand, according to Do Bao Ngoc, Deputy Director General of Vietnam Construction Securities Joint Stock Company, the reduction of the market was caused by the concerns about the pandemic, so when the pandemic is under control, the market would recover very quickly, this was verified many times from 2020 until now. Besides, the roots for the development of the stock market were macro-economic factors, profit growth of firms and cash flow factors all of these factors were still positive. In terms of cash flow, the monetary policy was still being loosened, interest rates were still low and cash flow had shifted from savings and other investment channels to investment securities channel. That explained why the market's liquidity was still three times higher than the same period last year and the stock market's moves were still positive, surpassing historical peaks and creating new price ranges. Regarding macroeconomic factors, Vietnam was still maintaining positive growth compared to much of the world. Regarding production and business activities of listed firms, by the end of the first quarter, profits increased by about 60%. It is forecasted that business results of the second quarter would be positive; the growth would not be lower more than 30%. The whole year of 2021 is forecast to grow at about 25%.

“These were positive factors, which were a foundation for the stock market to develop in the long term. When the pandemic is controlled, the market would surely recover quickly. The VN-Index's range of 1,400 to 1,450 points was appropriate with the valuation level corresponding to the profit growth of 25-30% of listed companies in 2021," Do Bao Ngoc forecast