While technical indicators show a potential upward trend, investor sentiment is still unpredictable, casting doubt on the stock market trajectory in May.

Recovery despite poor liquidity After a sharp decline last month, the stock market showed signs of recovering from the end of April through early May. The VN-Index of the Hochiminh Stock Exchange (HOSE) made a 5.5% rebound between April 23 and May 6, including a significant surge of over 20 points on May 6. The trading volume was higher than in the preceding days as well, improving the sentiment of most investors. Thus, after a slide into the support zone of 1,170-1,180 points, the VN-Index has recovered, with technical indicators in favor of positive momentum. That said, liquidity remains modest, suggesting cash is not ready to flow back into the market. In this recent rise, the average trading volume on the HOSE was only 500-600 million shares per session. It is important to note that the persistent rise of the U.S. dollar against the Vietnam dong was a major source of pressure on the market during the first half of April. This increase not only prompted foreign investors to step up selling due to concerns over foreign exchange risks but also significantly impacted the performance of businesses that rely on foreign currency loans or imported raw materials and inputs. Recently, the exchange rate has shown signs of being steady, backed by the measures of the State Bank of Vietnam (SBV), which include selling US$500-700 million to banks and injecting money into the system via open market operations, which have offset the funds absorbed into the foreign exchange channel. In April foreign investors net sold VND6 trillion of shares on the HOSE, marking the third consecutive month of their sell-offs. There is a glimmer of hope, though. The accumulated net selling from January through April 2024 reached nearly VND20 trillion. For more than a year now, January 2024 was the only month in which foreigners were net buyers, even though the value was negligible. On the contrary, foreign investors on the HNX unexpectedly net bought over VND77 billion of shares last month. A significant shift is now observable in foreign cash flows, with net purchases resuming in recent sessions. Foreign investors were net buyers on May 3 and May 6, amassing a total of VND819 billion of shares across all the three exchanges. Similarly, proprietary traders at securities firms net acquired over VND990 billion of shares in the first three trading days of May, including a substantial VND890 billion on May 3. This upturn might coax some investors back into the market, spurred by the perception that it has reached a bottom and is poised for a new upward trajectory. However, analysts caution that the recent rising momentum may not be robust, and the risk of a market correction is still out there, as May is historically a challenging month for stock investors. Market uncertainties persist in May Securities firms suggest the stock market is currently in the middle of short-term accumulation, hence a potential correction. Investors are advised to consider building their portfolios during a correction rather than in a significant market rally. Looking ahead, the VN-Index is expected to continue rising towards the resistance level of 1,250 points. However, BIDV Securities Company (BSC) warns that profit-taking pressure may build up as the index approaches this level, particularly in areas previously affected by sell-offs, where liquidity continues to be weak. While technical indicators show a possible upward trend, investor sentiment remains unpredictable, casting doubt on the market movements in May. This unpredictability leaves open the possibility of the VN-Index forming a double top pattern, potentially leading to substantial declines when investor excitement peaks. As banks are beginning to increase deposit rates, there is growing concern over the potential burden on the market. Inflation in the coming months will be a critical indicator given the depreciation of the Vietnam dong against the U.S. dollar. Many domestic companies, reliant on imports of materials, face rising production costs due to the volatile exchange rate, which could lead to higher product prices. A shift in trade dynamics, with the trade surplus leveling off, poses further challenges to the exchange rate stability. Michael Kokalari, director of the Macroeconomic Analysis and Market Research Department at VinaCapital, recently noted the persistent downward pressure on the dong. He forecast that inflation in Vietnam could reach 4-5% by year-end, influenced partly by rising oil prices. Consequently, deposit interest rates might edge up by 50-100 basis points by the end of 2024. Despite these adjustments, Kokalari suggested that higher deposit rates are unlikely to significantly affect the stock market. The market and investors were initially excited about the scheduled launch on May 2 of the KRX stock trading system. However, on the last trading day of April, the State Securities Commission of Vietnam announced that there was an insufficient basis to approve the system's official launch. This announcement disappointed investors and market participants, who were anticipating that the new system would enhance market liquidity. Moreover, despite the "Sell in May" phenomenon, data showed that the Vietnamese stock market often rebounds impressively after its declines in May. Over the last decade, six out of 10 Mays ended with significant growth, with the VN-Index increasing over 3%. Notably, May 2021 saw the largest rise at 7.7%. However, there were years in which the market dropped in May, with 2014 down 1.4%, 2018 down 3.5%, 2019 down 3.3% and 2022 down 3.6%, which highlights the month's unpredictability and reputation as an uncertain period for the stock market.