Looking ahead to fourth quarter stock performance

There continues to be a very strong negative correlation between the five-year government bond yield and the price-to-earnings (P/E) ratio of the VN-Index. The trend continued during the third quarter when rising bond yields were accompanied by a falling P/E ratio. We expect the five-year government bond yield to rise modestly during the fourth quarter. This would imply that the P/E ratios would, at best, remain flat. However, the government has recently reversed the provisions of Resolution 78 and will begin selling shorter term bonds again. This is likely to increase demand for government bonds from banks so that we could see lower yields in 2016’s first quarter, and therefore, a higher P/E ratio. Vietnamese listed companies recorded strong earnings growth over the past 12 months. Consumer companies recorded strong gains due to low inflation and high retail sales growth. Industrials fed Vietnam’s GDP with more than 60 per cent earnings growth, and utilities had the highest growth at a whopping 189 per cent. However, earnings per share performance was much weaker, because companies raised large amounts of capital through the issuance of new shares, and also because we measure the median earnings per share growth, whereas we look at aggregate earnings growth, so our recorded earnings growth is more skewed toward large caps.

The question going into 2016 will be whether companies can make productive use of the new capital they have raised in order to continue showing good growth. While the macro fundamentals are strong, there is certainly a lot of risk. Exporters will see increased competition from China due to the weaker yuan. The key driver will be the continued growth of US consumer demand, which right now seems strong. Assuming the Trans-Pacific Partnership (TPP) passes through the Congress during the first quarter of 2016, it will give a psychological boost to the market, but the real benefits will not be felt for a few years. While the prospects for growth seem uncertain, the current prices of Vietnamese shares still seem cheap. The VN-Index is currently trading at a trailing P/E ratio of just 11.3x. This is much lower than our neighbours, even though our macro fundamentals are still strong, we have a more stable political environment and are forming strong economic and political relationships with world powers. Furthermore, within the past year, the VN-Index P/E ratio has broken through 14x several times. It certainly could be possible again. In our previous Market Outlook report, we predicted that the VN-Index could close 2015 at 650-680 if the TPP was passed. The TPP has been agreed to by the negotiators, but not yet passed by the Congress. Adding this to all the uncertainties discussed above, 650 to 680 seems a bit rich. Momentum and sentiment are currently positive though, so that 610 to 640 is likely. This would still result in a gain of 12.0 to 17.4 per cent for the year, which would be in-line with the long-term trend. At 640, the VN-Index would still be trading at just above 12 times trailing earnings, which would set the stage for solid gains in 2016’s quarter, especially if the TPP is signed into law. This will boost market momentum and push the VN-Index towards a 14x P/E ratio at the level of 680 to 700 during 2016.

By Barry David Weisblatt Head of Research VPBank Securities