In recent months, the Vietnamese stock market has emerged as one of the most remarkable performers globally, capturing the attention of investors worldwideEsteemed financial institutions, including Goldman Sachs and Morgan Stanley, have advised their clients to increase investments in emerging markets, with Vietnam highlighted as a prime target for investment opportunities.

Despite this impressive performance, the market suddenly experienced a drastic plunge, with a staggering 6% drop in financial stocksAlthough there was some recovery before closing, the market still ended with a notable 4% decline.

What could have led to such a significant drop? Could this signal the onset of a new financial crisis for emerging markets? These questions are crucial for investors to consider as they navigate the complexities of global finance.

Since March of last year, global stock markets have rebounded swiftly after experiencing significant fluctuations

This resurgence has resulted in a series of dramatic price increasesFor instance, although the U.Seconomy has not yet returned to pre-pandemic levels, stock market valuations have continually risen, recovering even from several instances of abrupt declines, and even reaching record highs.

This scenario is far from coincidentalFollowing massive monetary stimulus measures instituted by the Federal Reserve and other central banks during the pandemic, the world has found itself in a phase of excess liquidity, leading to rampant inflationAgainst this backdrop, financial markets have surged, reaching unprecedented levels.

The valuation distortion is particularly pronounced in emerging markets like Vietnam, which is heavily reliant on external trade and manufacturingIntuitively, the pandemic's impact on global trade was anticipated to severely slow down economies like Vietnam's, leading to stagnation or regression

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Nevertheless, the stock market in these regions has prospered amid the overall bull market.

On one hand, the excessive money supply combined with disruptions in global trade has caused goods shortages, leading to rising commodity prices and increased foreign trade ordersThis situation has created a façade of economic recovery for these countries, making their rebound appear swift and robust.

On the flip side, the stock market operates by pricing future expectationsThe swift depreciation of the U.Sdollar, compounded by global optimism regarding economic recovery, has made it easier for emerging markets with relatively small capital bases to show inflated valuations.

However, the risks following such rapid hikes are evidentWith these soaring stock markets, the influx of international speculative capital does not simply result in tales of overnight wealth; it often brings with it the ruthless scythe of financial reckoning.

Many market analysts link the recent plunge in Vietnamese stock prices to the resurgence of COVID-19 cases within the country

This perspective is difficult to refute, as the spread of the virus naturally diminishes optimistic market expectations about Vietnam’s economic recovery, resulting in a downward adjustment of stock valuations.

However, beyond this specific downturn, there are broader macroeconomic factors at play.

Emerging markets generally have lower total GDP figures and relatively shallow financial marketsTherefore, when faced with favorable growth projections, these markets are more susceptible to experiencing rapid growth exceeding ten percent.

Since last year, the Federal Reserve's aggressive money-printing has driven market interest rates to exceptionally low levels, enabling financial institutions to secure funding at minimal costs for investmentFurthermore, the depreciation of the dollar has decreased the appeal of holding dollar-denominated assets, prompting capital to flow towards emerging markets like Vietnam.

Yet, this situation is nearing a pivot

The Federal Reserve is now signaling a tightening of monetary policy, and with the U.Seconomic recovery gaining traction, the dollar may soon stage a rebound, leading to renewed interest in dollar-denominated assets.

In this context, it is easy to see why international funds, often characterized as 'hot money', may quickly pivot back to the U.Smarket, bringing along freshly harvested profits from emerging economiesAs these markets potentially face the loss of economic gains accrued over coming years, they risk descending into a prolonged cycle of dependency on foreign capital.

Despite the tumultuous year and the recent market volatility characterized by repeated declines, the financial crisis is far from overThe liquidity surge in global markets has inflated enormous valuation bubbles, which are poised to unravel following the Fed's policy shifts and capital exit strategies.

The ebullience of the financial markets cannot persist indefinitely, and the entities left holding the financial bag will unlikely be Wall Street’s titans of finance