High inflation threatens the stock market
Last update 16:37, Wednesday, 22/09/2010 (GMT+7)
VietNamNet Bridge – The return of high inflation and tension in the monetary and credit markets have made stock investors more pessimistic. Analysts have warned that the stock market may continue to be gloomy for quite some time.
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After five months of successfully keeping inflation rates at low levels (the CPI increased by only 0.3 percent a month on average), the CPI increased sharply again in September 2010. HCM City has reported the CPI rose sharply, by 0.97 percent in September, while a CPI increase of 0.96 percent has been reported in Hanoi.
The General Statistics Office will release CPI figures for the whole country in a few days. However, the CPI figures for the two large cities alone show that inflation in September will be approximately one percent. Analysts believe that the main reason behind the high inflation rate in September was the decision by the State Bank of Vietnam to devalue the dong by 2.09 percent one month ago. The decision caused many companies to raise their sale prices, thus leading to increases in the price of goods and services.
Prices for imported products such as steel, fertilizer, pesticides, and high-tech products increased immediately after the dong/dollar exchange rate adjustment. Other goods like rice, food, and teaching materials increased later due to a higher demand for exports and the high sales season.
On September 21, many big investors tried to sell shares on the HCM City market, reasoning that a high inflation rate threatens gains from the stock market,
Nguyen Hoang, a stock investor on Saigon Securities Incorporated’s trading floor, noted that a lot of investors want to escape from the market when they see high inflation returning. However, Hoang also said that many investors want to take full advantage of the occasion to purchase shares at ‘soft prices.”
What will happen next?
Though the Government has applied many measures to force interest rates down in order to stimulate the national economy, interest rates remain very high. Businesses still have to bear high lending rates and the business environment has become more difficult, so many companies have reported losses or decreases in profit.
The return of high inflation would force the State Bank of Vietnam to continue its policy of tightening credit. If so, cash flow to the stock market will be hamstrung. It will be difficult for companies to borrow capital to expand their businesses, while stock investors and real estate developers will find it difficult to borrow money to make investments.
Meanwhile, interest rates for Vietnam dong and foreign currency deposits and loans tend to rise after they have been low for some time. Gold and dollar prices keep rising, a sign that investors are more pessimistic. Analysts cite all these factors to prove that the stock market will be lackluster for some time.
Source: Nguoi lao dong
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