But Vietnam’s stock market meltdown also has echoes of China’s property market distress and anti-graft campaign, two factors that rapidly darkened the mood in the Southeast Asian country after a blistering 34% rise in the index in 2021.
The correction this year is a healthy reality check for both investors and debt-laden companies, according to Bristol University finance lecturer Tuan Ho.
But what he had not expected was that the state’s crackdown on corruption, which included arrests of executives suspected of breaching bond rules, would so widely rattle investors, who pulled cash from bonds and stocks in response.
“What surprised me is the speed of the deleveraging,” Ho said in an interview. “Because of some events, people suddenly had to do it quicker than expected. That’s really a shock.”
Even strong companies have struggled to roll over debt as spooked investors redeem bonds early. Corporate debt issuance dropped 56% this year through October versus the same period last year, the Vietnam Bond Market Association said.
After banks, the biggest issuers were real estate companies, a sector that comprises roughly 20% of the VN Index and has seen several high-profile business leaders arrested this year.
As with Xi Jinping in China, Vietnam’s Communist Party boss, Nguyen Phu Trong, has presided over a signature drive to root out corruption. Both men are serving unprecedented third terms, using their grip on power to defenestrate misbehaving officials, in both the party and the biggest corporations.
The scrutiny has left companies skittish about raising funds or making other big corporate moves that may draw a spotlight, though people in the private and public sectors say it will clean up some industry practices. After its founder was detained for alleged opaque trades, for example, publicly listed property developer FLC submitted a plan to improve its disclosure policy, the Saigon Times reported.
Prime Minister Pham Minh Chinh told businesses last week in a speech that Vietnam will “guarantee political stability and social order so everyone can live in peace, developing (the economy) healthily, in accordance with the law”.
Like in China, Vietnam’s homebuyers often pay in instalments while their condominiums are being built, rather than after construction, essentially giving developers interest-free loans upfront.
As economic growth slows, concerns about liquidity risk have added to pressures in the real estate industry. Net profit at listed property firms was up last quarter but down 1.4% in the first nine months of 2022, year on year, compared with profit growth of 21.4% for listed companies as a whole, according to VNDIRECT.
“We believe the market would continue this high volatility for the next one to two quarters when we consider current headwinds, including credit tightening amidst a high interest-rate environment, and weakening corporate credit capability at capital-intensive stocks like real estate and construction materials,” Nguyen Quang Thuan, chairman of financial data provider FiinGroup Vietnam, told Nikkei Asia.
Beyond the idiosyncratic risks related to real estate and corruption, Vietnam is highly exposed to the reduced consumption brought on by recessions around the globe. Its foreign trade was equivalent to 208% of gross domestic product in 2020, the highest level in Asia outside of shipping hubs Singapore and Hong Kong, according to Our World in Data.
Production of exports, from clothes to furniture, is falling, which is showing up in corporate performance. There were “more disappointments than positive surprises”, with 33% of publicly traded companies missing VNDIRECT’s earnings estimates in the first three quarters of the year, 17% beating forecasts, and 50% in line with them, the brokerage said.
“Investors could be over-optimistic if they push the market up too far,” Ho said in a phone call. “I think being overoptimistic will be a risk for the whole economy.”
Investors started pulling funds out of Vietnam this year after central banks in the US and elsewhere raised interest rates. Cross-border outflows have slowed, but overall capital contributed by foreigners is still down 5% this year, as of Nov 20, compared with the same period in 2021, the investment ministry said.
The Southeast Asian country saw a record number of novice investors pile into securities markets during the Covid lockdown. Ho predicts the current bear market will prompt many first-timers to do more homework on future investments.
“In the short term, these people who want to get rich quick basically lose money,” he said. But as the tide of easy money goes out, for both investors and companies, “That is a kind of cleaning up of the balance sheet of the corporates, the banks, and also brings discipline to the bond market. So in the long term, that makes things safer.”