High margin debt, weak liquidity put pressure on stock market recovery

High margin debt, weak liquidity put pressure on stock market recovery

Stock market liquidity continued to weaken in September, falling below VNĐ15 trillion (US$579 million) per session, even after Việt Nam was officially upgraded by FTSE Russell to secondary emerging-market status.

An investor watching the market performance while talking on phone. — VNA/VNS Photo

 High margin lending, weakening market liquidity and rising deposit interest rates are increasing pressure on Việt Nam's stock market, with further capital withdrawals potentially triggering forced selling if share prices continue to fall, according to market analysts.

In its latest report, SGI Capital identified elevated margin lending amid unfavourable liquidity and interest-rate conditions as one of the market's most notable risks.

Stock market liquidity continued to weaken in September, falling below VNĐ15 trillion (US$579 million) per session, even after Việt Nam was officially upgraded by FTSE Russell to secondary emerging-market status and the first round of related buying took place.

Foreign capital has yet to provide sustained support. Foreign investors bought shares on a net basis for only about a week around the upgrade before returning to the net-selling trend that had persisted since the beginning of the year. 

Meanwhile, listed companies continued to have substantial demand for new capital, adding to fundraising pressure on domestic investors.

SGI Capital noted that weaker liquidity did not necessarily mean the number of shares requiring absorption had declined accordingly. When selling pressure increases but buying demand remains insufficient, share prices can fall more quickly, particularly for stocks with high margin usage or a concentration of short-term investors.

The risk is becoming more pronounced as deposit interest rates face upward pressure while new money remains insufficient to offset capital leaving equities. Higher deposit rates make savings relatively more attractive than risky assets and increase the opportunity cost of holding shares.

SGI Capital warned that further increases in deposit rates could prompt more investors to leave the stock market, potentially triggering a cycle of margin calls. The fourth quarter is also typically a period of higher liquidity demand as loans and investments approach year-end settlement.

Higher borrowing costs can reduce the returns from leveraged investments, especially when share prices move sideways or decline over an extended period. The longer investors hold borrowed positions, the greater the cumulative cost pressure.

Previously, Nguyễn Văn Trúc, head of analysis at National Securities Inc. (NSI), said increases in margin lending rates reflected securities companies' rising funding costs. Higher borrowing costs narrow expected returns from leveraged trading and can affect the frequency and scale of investors' transactions.

If share prices continue to fall, the pressure can translate into account-level risks. Investors who buy shares using both their own capital and borrowed funds suffer losses on their equity that are proportionally greater than the decline in the share price. When collateral values fall below prescribed thresholds, securities companies may require additional collateral or debt repayment.

If investors fail to comply, their shares may be forcibly sold. Such selling can reinforce the decline. Forced sales add supply to the market, and if buying demand remains weak, prices may fall further, pushing other accounts closer to their own margin thresholds. Successive rounds of compulsory selling can create a self-reinforcing margin-call cycle.

However, the extent of the impact depends on the composition of outstanding margin debt, collateral ratios, the concentration of lending in individual stocks and investors' ability to provide additional funds. Not all margin debt is at risk of being liquidated simultaneously.

SGI Capital also highlighted potential liquidity pressures across asset markets. A slowdown in property transactions could place additional pressure on equities, which can be converted into cash more quickly. Investors using borrowed money to hold several types of assets may need to sell part of their portfolios to meet payment obligations or restructure cash flows as loans mature.

Meanwhile, corporate earnings prospects remain uneven. SGI Capital expects third-quarter business results to remain positive year on year, although growth may slow compared with previous quarters. Commodity-linked sectors such as oil and gas, rubber and sugar could perform differently from interest-rate-sensitive industries, including property, securities and banking.

As a result, investors using leverage need to monitor not only the VN-Index but also their individual margin ratios, borrowing costs and the liquidity of their holdings. 

For the broader market, stronger liquidity and genuine buying demand will be important in absorbing additional supply if investors continue to reduce leverage. 

Bizhub