Lower interest rates not a good thing for equity market

Aug 14th at 07:57
14-08-2020 07:57:51+07:00

Lower interest rates not a good thing for equity market

Lower lending rates in the financial-banking market may not mean good things for the securities market, specialist Dao Phuc Tuong said on Wednesday.

 

Lower saving rates hit money savers first because their savings are not as profitable as they were, then purchasing power declines, Tuong, former investment manager at APS Asset Management, said.

“So if interest rates are getting lower, it shows businesses are struggling with their operation, leading to higher risks on the securities market,” Tuong said.

Lower interest rates pull the rates of government bonds down and the risk premium has to increase, he added.

For example, in the past 10 years, the US government bond rates have fallen too much while the US market’s risk premium has kept increasing, he said.

“When both interest rates and earnings go down, the company’s price-to-earnings (P/E) ratio will drop too,” the analyst said. “If earnings have a positive impact on P/E, the company shares will rise.”

“Interest rates will fall to a certain level. We cannot see it as a good factor for the securities market.”

According to Nguyen Duc Hung Linh, deputy CEO and Chief Investment Officer at PVI Asset Management, the average interest rate has been cut by 100 basis points since the beginning of the year.

“The declining pace is getting faster as interest rates have been trimmed by more than 80 basis points since May,” he said.

In the banking sector, the average interest rate for saving terma of 12 months ranges from 6.0 per cent to 6.5 per cent.

The market is expecting further rate cuts to help bolster the business community and the macro-economy, especially when local companies are struggling with the COVID-19 pandemic.

Economist Nguyen Tu Anh said that the recent rate cuts by the central and commercial banks are reasonable because of low demand for borrowing.

“There must be a close look at the relation between interest rate and inflation,” he said. “If interest rates keep falling further, people will switch to hold onto foreign currencies.”

“If the price of pork is under control, given current conditions, inflation in 2020 will stay below the targeted 4 per cent,” Linh said.

In addition, there is no need to worry about the lack of dollar supply as the State Bank of Viet Nam (SBV) will buy more greenbacks to raise the foreign reserve and keep the Vietnamese dong stable, he said.

Public investment

Economist Anh said hastening the budget spending for infrastructure development is the key to boost the economy in a struggling world amid the COVID-19 pandemic and rising geo-political tensions.

“Public investment is among the spearheads to drive the economy, but Viet Nam has failed to take advantage of it because of a poor legal framework,” Anh said.

“The amended Law on Public Investment, taking effect on January 1, is expected to help resolve all legal issues related to development projects.”

“Viet Nam has room to boost its economy using public investment,” Anh said.

In the first seven months of the year, public spending increased by 34 per cent on-year. Since the beginning of August, three transportation infrastructure projects will receive funding from the State budget instead of being joint programmes under the Private Public Partnership (PPP) deals.

Those activities will boost the spending and inject “real money” into the economy, Anh said. “What really matters now is which sectors and companies will really benefit from those activities.”

According to the economist, the Government expects to inject about VND560 trillion (US$24.3 billion) into infrastructure projects in 2020, thus there is much work to do in the last four months of the year.

But the spread of the coronavirus may hinder the work, he said, as foreign investors are not allowed to enter Viet Nam to see the potential destinations, so they are unwilling to open their chequebook, Anh added.

The unpredictable development of the pandemic also has a negative impact on the sentiment among local businesses as they worry about the economic downturn, he said.

“But when people understand the nature of the virus and accept to live with it, the business community and the economy will have a chance to recover.”

However, specialist Tuong said that even when the Government speeds up the disbursement of the State budget, it doesn’t mean all sectors will benefit.

“What drives the market up at the moment is the expectations that higher public spending will boost shares of construction firms, real estate companies and material producers,” he said.

“But if the plan derails, the share prices of those companies will become the risks for investors.” 

bizhub



RELATED STOCK CODE (5)

NEWS SAME CATEGORY

Insurance businesses cashing in on pandemic

While life insurers continue to embark on their transformation journey to gain customers’ trust, non-life insurers are likely to dance on the razor’s edge as the...

Vietnamese consumers prefer using cashless payments

The total value of cashless transactions jumped six times in the first half this year against the same period of 2019.

Firms fail to take up tax payment postponement policy

The Government’s policy of a five-month extension for tax payment deadlines did not attract a large number of firms.

Shinhan Bank Vietnam and Van Lang University sign comprehensive partnership agreement

South Korean lender Shinhan Bank Vietnam and Van Lang University have officially announced the signing of their comprehensive strategic partnership on August 7 in...

Foreign banks pour capital into Vietnam

The International Finance Corporation (IFC), a member of the World Bank Group, announced on August 11 that it will provide a 70 million USD loan to Indo Trans...

Foreign banks confident and committed to VN's economy

International Finance Corporation (IFC) - a member of the World Bank Group and one of the largest global development institutions focused exclusively on the private...

Indo Trans Logistics receives $70 million financing package from IFC

The IFC, a member of the World Bank Group, is providing a financing package of $70 million to Indo Trans Logistics Corporation of Vietnam in an aim to support the...

Banks to continually cut costs to aid COVID-19 affected firms

The State Bank of Viet Nam (SBV) has asked banks to further reduce operating costs in the remaining months of the year in order to continue lowering interest rates...

Vietnam c.bank’s latest rate cut expected to reduce pressure on budget spending

Cutting deposit interest rates on required reserve of commercial banks is not a further monetary easing.

Sun Life Financial increases footprint in Asia

Canada-based insurer and asset manager Sun Life Financial is seeking opportunities to acquire Asian companies in a bid to increase its footprint in the region.

Bank stocks

Insurance stocks


MOST READ


Back To Top