Monthly Market Outlook

Strong momentum was maintained in July, with the VNIndex closing the month at 1,222.9, equivalent to a +9.2% MoM increase.  The VNIndex achieved 21.4% YTD as of July.  Liquidity also increased 8% MoM, to $800 mil USD/day.  Property, consumer staples, and consumer discretionary sectors were leading the market during the month (all 3 sectors staging a reversal from being the most laggards in 1H23). The market has been cheering Vietnam’s dovish monetary policy, and as the fruits of that we are seeing the deposit rate being reduced to be lower than pre-Covid levels, and approaching the Covid-year low: After 4 policy rate cuts, a new 1Y deposit earns 6-7% p.a. (as compared with the peak of 10-11% in the beginning of the year), while the lending rate dropped to 9%-10% p.a. for new non-mortgage loans.  Mortgages have been repriced accordingly, from 14-15% to around 12% p.a.  The overnight rate has been reduced to a low, tight range of 0.2-0.5%, reflecting abundant liquidity in the system. Retail investors found putting money in the banks is no longer as attractive a proposition, while both the property market and corporate market could attract only a slim number of new buyers. Retail investors again flocking to the equity market is the apparent choice du jour nowadays.

GDP for 1H23 posted at 3.72% YoY, which has turned the government’s annual GDP target 6.5% to mission impossible, as it might require at least 9% GDP growth for 2H23. 1H23 also marked the lowest six-month span growth period since 2011 (that is, if we exclude 2020). In terms of expenditures, much of the growth in GDP came from net exports despite the fact that official data for both export and import growth declined by double digits. Meanwhile, both the final consumption print (+2.68%) and gross capital formation (+1.15%) were below overall GDP growth, more datapoints confirming that the country is struggling to ignite key growth drivers. Accordingly, we maintain our FY2023 GDP growth forecast range unchanged at 4.5% to 5% and remain cautious in terms of near term outlook, as too many supporting measures lean too much on Vietnam’s dovish monetary policy, while fiscal policies are showing to be challenging when it comes to execution.

The VNIndex increased by 26 pts in May (equivalent to 2.5% MoM), while liquidity improved significantly towards the end of the month. Average liquidity of the HOSE in the last two weeks of May increased by 32% as compared to the average level in Q1. While foreign investors net sold VND 3.42 tn in May (mostly via ETF funds), interest of retail investors has come back to the fore, and this has been the key driver for the market’s positive performance so far. Weight of foreign investors’ trading have been reduced significantly to 6.5% - similar to that during the Covid years. Within May, there has been a number of positive news items. Firstly, the central bank has continued to embark on rate cuts amongst various policy rates for the third time YTD, the latest by another 0.5%.  Liquidity in the banking system is likely more than sufficient, while weak credit demand explained a lower degree of borrowing. Annual credit growth tracked to the end of May was just 3.17% YTD so far. Secondly, the 8^th Power Development Plan was approved by the Prime Minister on 15 May. In essence, the plan involves the reduction of the degree of coal-fired power being relied upon, being replaced by renewable energy.  At the same time, there has been a priority to develop gas-fired power using domestic gas. Accordingly, investors can well expect large investments in power and oil & gas sectors in the coming years.  Last but not least, the National Assembly sessions from May 22nd to June 23rd has been an item on the watchlist for investors, as these meetings have been a source of much discussion on new supporting measure proposals for the economy and financial sectors. According to the Ministry of Finance (MoF), public investment disbursement for the first 5 months grew by 20.7% YoY, which is quite encouraging.

In the previous cycle, even when the interest rate already peaked and started decreasing, the market remained very volatile and only bottom out several months later.   We keep our view that market is very volatile this year, but the market could find its bottom within the next 3-6 months.  The lagging time between the peak of interest rate and the bottom of the market is because the market need to see whether the supporting policies are strong enough to get the economy back to growth momentum.   The SBV released data that shows credit growth having posted at 2.06% YTD as of the end of March, which clearly picked up in the second half of March (figure as of 20 Mar at 1.61% YTD) after a broad-based decline in lending rates in recent weeks. We will need to watch the pace of interest rate reduction, as well as the ability for credit growth to increase stronger in the coming months.

We await the Federal Reserve Board’s next rate hike decision on March 22, 2023. A milder shift by the Fed of 25 bps in February to a range of between 4.50% to 4.75% following the 50 bps hike in December does not suggest a less hawkish tone, in our view. Fed Chair Jerome Powell emphasized that he anticipates “ongoing (rate) increases” are likely needed to tame inflation.  Domestically, March is a difficult month for C-bond repayment, based on SSI Research data. Decree 08/2023 - a long awaited revision of Decree 65 and Decree 153 - was surprisingly approved at the beginning of March. This provides a new legal framework for the re-negotiation between bond issuers and bondholders for payment extension of maximum 2 years. As mentioned earlier in our 2023 Vietnam Market Outlook Report, it will take time to see if Decree 08 could be a practical and effective resolution to address current bond market challenges but the new regulation is expected to put a temporary hold on official defaults - especially in the case of NVL. C-bonds need to be closely monitored this month.

2023 began on a high note across global equities amid hopes that central banks are closer to ending their rate hike cycle and China reopening. However, that high note may need to be seen in company fundamentals. Domestically, the VNIndex gained 10.34% during January, with inflows from foreign investors continuing to be a key support. We think that a set of factors, including higher expectations of a more stable currency and long-term attractive valuations are the main factor spurring foreign inflows. February is normally a month without corporate news in Vietnam, so attention should be paid to macro developments, such as the Decree 65 revision to be proposed, public investment disbursement, and macro data that is released during February. In addition, foreign inflows over the past few years used to be strong in Q1.

The Vietnamese equity market finished 2022 with a monthly decline of 3.9% and closed the year down 32.78%, the worst showing since 2008. A decent rebound was witnessed in the first half of December due to aggressive foreign inflow and local bargain hunters. However, investors took profits before the Christmas and New Year’s holiday, causing the market to cool down during the last week of December. The VN30, VN Midcap, and VN Smallcap indices decreased  -35%, -41% and -51%, respectively, during 2022.

The Vietnamese equity market experienced an unforgettable month during November as when it drove investors from an extreme fear pitch, which later reversed into a market euphoria. The VN Index dropped like a stone during the first two weeks of the month - breaching the psychological 900 point level to 873.8 points (-41.6% YTD) on the 16^th of November. With the government sorting out the issues related to credit growth cap and the corporate bond market, the stock market staged a spectacular rebound of 20% to close the month at 1,048.4 points (+2.0% MoM and -30.0% YTD). Encouraged by momentum at the end of November, the VNIndex extended its rally into the first trading week in December, supported by strong foreign inflows. The YTD deep correction of the VNIndex triggered both active and passive funds to return, pouring capital into the Vietnamese equity markets. Despite a 20% rally since the trough, valuations of Vietnamese equities still look cheap relative to regional peer.

While the US equity market had an impressive rebound during October, the Vietnamese equity market tanked with the VNIndex losing -9.2%. This marks the second  consecutive month of declines, as interest rate hikes and VND depreciation cast a heavy shadow. With a 31.4% YTD drop in the VNIndex, we believe that the market has largely factored in weaker earnings prospects and macro risks (anti-corruption crackdowns, and headwinds in the corporate bond/real estate sector). In any event, we are hopeful that the market will bottom sometime over the next six months. During the  market downturn between 2011-2012, the VNIndex plummeted 36% with the duration of the bear market lasting 11 months (from Feb 2011 to Jan 2012).

The ongoing crusade of global central banks against inflation has forged ahead, even at the expense of economic growth. Whisperings of the possibility of a Credit Suisse default has been a contributing factor of the weak stock market. Not being an exception, the Vietnam stock market in September tumbled -11.5% and closed September at 1,132 points. YTD, the VN Index lost -24.4%. The accelerating selloff extended during the first few days of October, as retail investors looked for the exit door, while sharp price declines have triggered margin calls, not to mention net selling by foreign investors.

While a recession becomes more visible in developed markets, Vietnam’s macroeconomic data tracking August performance continue to illustrate the resilience and recovery of the Vietnamese economy since it officially re-opened during the first quarter of 2022. More specifically, the August data set exhibits double digits growth in exports, industrial production, and retail sales and tamed CPI. With such a welcome upside surprise and the resultant momentum, Vietnam likely will post double digit GDP growth for Q3. The long- awaited credit limit extension for the banking industry has finally been granted by the Vietnamese central bank, which reflect a conservative stance in our view.

In H2 2022, the Vietnamese economy likely will continue to be impacted by US inflation; Fed rate hike spillover effects; and a global recession in the context of: (1) weaker export turnover which places pressure on the VND; and (2) weaker domestic demand as a result of high inflation. While 2H22 macro data suggests a promising combination of low CPI and high GDP growth off of a low base 2021, investors are faced with a 2023 riddled with uncertainty. In 1H23, we could witness a pickup in CPI, while GDP growth could decelerate. High CPI could finally appear in late 2022 due to the adjustment of products and services (electricity, tuition fees, and healthcare fees). The Vietnamese government’s priorities are to tackle inflation first, followed by growth as inflation risk fades.

Q2 was another challenging quarter for equity markets globally, and Vietnam was no exception. Recession fears in developed markets have intensified during the quarter, causing sell-offs in both the equity and commodity markets. Commodities from metals to soft commodities have rallied impressively, outperforming other asset classes in H1 2022 and started to correct on a weaker demand outlook. Oil prices sliding to near USD 100/bbl at the time of writing has also contributed to recession concerns. After the Federal Reserve’s most aggressive interest rate hike in nearly 30 years, the market is now digesting the just-released FOMC minutes.  Prolonged political tensions and tit-for-tat between the West and Russia renders a financial environment which makes predictions challenging, to say the least. The quick spread of new Covid-19 sub-variants (BA4 and BA5) as well as Monkeypox are showing up further risk to global economies, which are vulnerable post-pandemic.

Key global macro risks of the war in Ukraine, tightening monetary policy, the fear of economic recession and Chinese Covid-19 restrictions continue to weigh on the equity market. In Vietnam, higher inflation and interest rates likely will manifest themselves over the medium-term. As such, we see no clear strong catalysts in the short-term to support the equity market. However, as the VNIndex has already dropped 14% YTD and suffer big turbulences in the past 2 monhts, we are of the view that most negative factors mentioned above are at least partially priced in.

Update on SSI Research Top recommendation: This month, we remove DGC from our top call list as the share price reached our target.

April 2022 was the worst month of the Vietnam equity market since March 2020. External factors, such as prolonged the Russia- Ukraine conflict, lockdowns in China, and the prospect of tighter US monetary policy have all weighed on investor sentiment - and Vietnam was no exception. Domestically, ongoing investigations of capital markets activities and the real estate sector misconduct have impacted local investor sentiment. In the context of rising interest rates, investors have shifted to a risk-off stance. Money flow also returns to business activities post-pandemic.  We believe that these factors will continue to cast a shadow on market sentiment through May, especially when the earnings and AGM season ends.

Update on SSI Research Top recommendation: This month, we add VEA and PVT to our top call list and remove VHC as the stock reached our Target price.