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 August 13.

lower interest rates not a good thing for equity market hinh 0
Transactions at VPBank (Source: cafef.vn)


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,” he 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% to 6.5%.

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%,” Linh said.

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

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 Vietnam 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.”

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

In the first seven months of the year, public spending increased by 34 percent 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 Vietnam 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.”

VNS/VNA