Fed rate hike unlikely to disrupt Vietnam’s stock market

At its policy meeting on September 17, the Federal Open Market Committee of the US Federal Reserve decided to raise the federal funds rate by 25 basis points, bringing the target range to 3.75-4.00 per cent. This was the Fed’s first rate hike since 2023 and was approved unanimously by a 12-0 vote.

The decision came as no surprise, with previous surveys showing that the probability of a Fed rate hike had risen to nearly 90 per cent. The market is now pricing in at least one more rate hike this year, as inflation remains elevated and is showing signs of rising again amid higher oil prices.

Goldman Sachs expected the US Federal Reserve to raise interest rates by another 25 basis points in October, following the US central bank’s hawkish signal.

The new forecast marks a reversal from Goldman Sachs’ previous view that the Fed had completed its monetary tightening cycle following the 25-basis-point rate hike in September.

Goldman Sachs said the Fed’s updated rate projections strongly suggested that most policymakers expect at least one more rate hike this year. The investment bank sees October as the most likely timing for the next increase, as policymakers believe further tightening would help bring inflation back to the 2 per cent target more quickly.

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Following the Fed’s decision, the DXY index rose sharply and is now trading above the 100-point mark, compared with 99.6 a day earlier. However, the impact on Vietnam’s stock market is expected to be limited.

Truong Quang Binh, an analyst at Yuanta Vietnam cited historical data showing the VN-Index has typically tended to decline ahead of Fed rate hikes. In the three Fed rate hikes recorded during the 2005-2026 period, the VN-Index fell during the 20 sessions preceding each decision, by around 4 per cent in December 2015, 1.3 per cent in December 2016 and 3 per cent in March 2022.

“Following the rate hikes, the VN-Index did not record significant declines over the subsequent five sessions, indicating that the short-term impact on the market was not particularly large. Over the medium term, performance after 20–60 sessions will depend on a range of factors, notably domestic interest-rate trends and exchange-rate movements,” said Binh.

“From an investment-strategy perspective, we recommended that investors reduce their equity exposure from the beginning of last week. Under the current conditions, investors should continue to maintain a low equity allocation, at around 40 per cent in stocks and 60 per cent in cash, while waiting for the market to fully reflect the new factors and for valuations to become more attractive before deploying capital,” he added.

Binh noted that investors should also closely monitor developments in exchange rates and domestic interest rates. If these factors do not deteriorate in the coming days, equity exposure could gradually be increased.

Taking a more cautious view, Luong Duy Phuoc, director of Market Research at Kafi Securities, said Vietnam’s market had already made some preparations for a scenario in which the Fed maintains a tighter monetary policy stance. As a result, the key factors to watch after the meeting will be the response of US Treasury yields and the US dollar.

“However, if US Treasury yields and the USD rise more sharply than expected, pressure on the exchange rate and foreign capital flows will become factors requiring particular attention. Therefore, the key variable for the stock market, in our view, lies in what comes after the decision: what signals the Fed sends about the next stage of its policy path, and how the US bond and currency markets respond,” he said.

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