HO CHI MINH CITY STOCK EXCHANGE BULL RUN IN CONTEXT

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000552 SENSITIVE SIPDIS STATE FOR EAP/MLS, USAID/ANE, EEB/TPP/BTA/ANA, DRL/AWH USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO TREASURY FOR SCHUN USTR FOR DBISBEE E.O. 12958: N/A TAGS: ECON EFIN EIND ETRD PGOV SOCI VM SUBJECT: HO CHI MINH CITY STOCK EXCHANGE BULL RUN IN CONTEXT REF: HANOI 475 HO CHI MIN 00000552 001.3 OF 002 ¶1. (SBU) Summary. Ho Chi Minh City Exchange (HOSE) investors enjoyed a dramatic near-doubling in the value of the Vietnam Index from 235 on February 24 to 512 on June 9, 2009. This coincided with a significant run-up in the major indexes on the other side of the ocean, but the steep gains also reflected Vietnam's healthiest economic quarter in some time. This has led many financial sector analysts in HCMC to conclude the Government of Vietnam (GVN) has brought inflation under control and the economy has been buoyed by the GVN financial stimulus package. But the Vietnam Index is still far off the 1180 peak reached on March 12, 2007 and signs of summer doldrums have appeared in recent weeks as direct foreign investment remains subdued and portfolio investors hesitate. Still, some analysts predict a late summer resurgence if global investors are able to begin rebuilding their shattered confidence. End summary. Riding the Rollercoaster -------------- ¶2. (SBU) The Vietnam Index, a broad market benchmark representing the value of the HOSE, climbed from its February 24 low of 235 to top off at 512 on June 9. The country director of Blackhorse Investment, Vietnam's top performing fund over the last six months, told EconOffs that it is important to look at 2009 market activity in the context of the past few years. The value of the Ho Chi Minh City Stock Exchange (HOSE) hit its all-time high of 1180 in March 12, 2007, shortly after Vietnam joined the WTO. After oscillating around 1,000 throughout the first half of 2007, the HOSE began to drop steeply in the third quarter, landing below 400 in the second quarter of 2008 as high inflation and trade deficits generated concerns about the macroeconomy. Then the global economic downturn struck in late 2008, and the HOSE began a second tumble that would take it to its February 2009 lows. ¶3. (SBU) By the time the HOSE reached its four-year low of 235 on February 24, many HCMC analysts felt Vietnamese valuations were attractive, and the market responded accordingly. The volume of trade rose from 175.11 billion dong (U.S. $9.7 million) on February 24 to 2,920,440 billion dong (U.S. $160 million) on June 9. Dragon Capital has more money under management than any other fund in Vietnam, and according to one Dragon economist, important macroeconomic trends supported the buying: Vietnam turned a $1.6 billion trade surplus in the first quarter of 2009 and inflation seemed to be in check (after approaching 30 percent in August 2008, headline inflation in March had fallen to 11.2 percent year-to-year),and lastly, retail sales figures were on the rise. ¶4. (SBU) By June 2009, investors had worked through all the good economic news and moved into a holding pattern with no real sense of direction, one VinaCapital manager advised EconOffs. In the week beginning June 8, the HOSE reached 512, its highest value of 2009. By the end of the week, though, a sell-off began that has persisted through to the present (as of July 13, the HOSE sat at 438.83) with major institutions selling massive volumes of stock. Most analysts attributed the sales to simple profit taking, and some also theorized that major holders were restructuring their portfolios while they could take advantage of favorable prices. A few believe the market has become over-valued. But as the Blackhorse fund manager observed, it is not a pure coincidence that investor sentiment in the HOSE began to cool at roughly the same time the run-up in the value of U.S. stocks cooled off. Into the Looking Glass -------------- ¶5. (SBU) Though the domestic economy in Ho Chi Minh City has been relatively robust since the first quarter of this year, low levels of FDI remain troubling to investors. Almost all the financial sector analysts ConGen has spoken with in recent weeks agree that the stimulus for another HOSE rally would likely come from outside Vietnam's borders -- either through increased FDI (which would signal long-term foreign confidence in Vietnam's economy) or through additional portfolio investment (dependent completely on a global economic recovery). Until FDI figures show a major improvement, most analysts expect the market to sit idle or even to fall slightly further. COMMENT -------------- ¶6. (SBU) Some have been surprised to read that the value of Ho Chi Minh City's Stock Exchange had nearly doubled from February to June, despite the global economic crisis. To explain this HO CHI MIN 00000552 002.2 OF 002 surprising level of "optimism", one business leader in Ho Chi Minh City contrasted the current global turmoil with the domestic macroeconomic/inflation crisis that Vietnam faced in 2008 saying, "give me May 2009 over May 2008 any day because Vietnam is much more predicable this year than last year -- now I can at least make rational decisions." If portfolio investors are truly waiting for substantial FDI growth to reinvigorate the exchange, then the fortunes of the HOSE, no matter how strong the domestic economy, will be heavily tied to the global economy and its ability to overcome the downturn. ¶7. (U) This cable was coordinated with Embassy Hanoi. FAIRFAX