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Many investors have become concerned with the banking system liquidity this year. The apparent reason is that the domestic monetary flow was on an upward trend during 2016, thanks to the SBV’s strong easing monetary policies; this has resulted in a strong boost for the market. Will this story repeat in 2017? We will discuss the risk and opportunities from the monetary flow perspective in today’s analyst pinboard.
The financial and monetary market can be thought of as a vessel of communication between economy investments, financial assets, real estate and commodities, as seen in Figure 1 below. In our macroeconomic report of 2016, we mentioned the concept of over liquidity in the system many times. The Dong’s oversupply will flow into the economy in many forms, including the stock market.
As seen in Figure 2, there is a close relationship between the growth divergence in money supply and credit and the VNIndex’s growth. In the periods when the growth divergence in money supply and credit widens, the VNIndex often increases. On the other hand, when the divergence contracts, the VNIndex shows signs of reversal. Based on classical statistical studies on 2 variables (x representing the growth divergence in money supply and credit and y representing the VNIndex’s growth), we find that x and y are positively correlated. R2 = 0.72 means that around 72% of the change in VNIndex can be explained by the divergence mentioned above.
While the FED has hinted at further rate hikes that trigger concerns over foreign capital, domestic capital is considered to be “fuel” for the market in 2017. According to the State’s plans, money supply and credit growth plans remain fundamentally unchanged, except for a more conservative credit plan to readjust to 18% growth instead of around 18-20% as in 2016. We expect easing monetary policies to continue in 2017.
From other perspectives, the risks to monetary policy direction include inflation risks and the risk of a FED rate hike. In terms of inflation risk, money supply has been rising significantly between 2011-2016, and M2/GDP is at a record high of 157.6%. Similarly, credit also increased at a fast pace with credit/GDP of 123%. Compared with regional countries, Vietnam’s M2/GDP is second only to China; its credit size stands at 4th place behind China, Thailand and Malaysia. Additionally, the average M2 and credit growth rate in 2006-2011 is as 1.5 times – 2 times as much as as the rate in 2011-2016. Money pumped into the banking system is considered to be a slow ticking bomb and the SBV needs to find way to defuse or otherwise, there will be asset bubbles.
We believe that quantity accumulation will lead to quality change. Based on the above observations, we strongly believe that the quantity accumulation is not enough to create change in the direction of the SBV monetary policy. The next thing to do is to observe the stimulating factors that will create change (higher than expected inflation or the FED accelerating the rate hike process), the SBV’s ability to manage the monetary supply-demand mechanism and the economy capital absorption capacity.
In general, RongViet Research believes that the SBV will continue the easing monetary policies in 2017. Redundant liquidity in the system will pump money flow into the stock market. Accordingly, the growth divergence between money supply and credit will be a leading indicator for the stock index trend.
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