No long-term hit on Vietnam’s stocks

Matthew Smith, head of Research at Yuanta Securities

The US election results have been close, but the best case for risk assets such as stocks (not just in Vietnam, but globally) was a clear and convincing win by either candidate. It is very likely now that the outcome will be contested in a long, painful, and heated process of adjudication in the courts. This would be bad for risky assets such as stocks. Ironically, it would probably lead to a stronger dollar as investors move out of risky assets and into “risk-free” assets such as negative real-yielding US treasuries and cash.

A Joe Biden victory coupled with a democratic takeover of the Senate would eventually probably involve higher tax rates for corporations and also higher personal tax rates for capital gains. If that is Biden’s plan, I suspect that we would see a lot of selling of US stocks at the end of this year because wealthy shareholders would prefer to pay 20 per cent of their gains as tax (the current maximum in 2020) rather than up to 40 per cent in 2021 and beyond.

But history shows that investors usually buy back the same shares after realising their taxable gains. So I think this would be more of a short term negative for US stocks.

By contrast, increasing corporate taxes on US corporations would obviously push down corporate profitability on a long-term basis. This would be a clear negative for US-listed stocks, and it would possibly increase the relative attractiveness of emerging markets, including Vietnam, for global investors.

Regardless of which candidate wins the US presidency, the relationship between the US and China in terms of both politics and trade is not going back to the pre-Trump era that has been in place for the past 20 years (and arguably since Nixon-Kissinger). Even if the rhetoric is toned down under a Biden presidency, US and global manufacturers are going to continue to diversify their production capacity to a broader geographic scope than the extreme concentration in China that has emerged since the China’s entry into the World Trade Organization two decades ago.

As such, Vietnam should continue to benefit from foreign direct investment (FDI) inflows in the medium term. The main reasons for the FDI slowdown year-to-date in 2020 are related to the COVID-19 pandemic. Manufacturers are reluctant to engage in major decisions during periods of extreme global economic uncertainty such as we have seen in 2020.

This is also exacerbated by the sensible restrictions on business travel that have been in place to control the spread of the virus. I suspect that once COVID-19 is brought under control globally, there may be a surge of pent-up FDI into Vietnam.

As of Saturday we still do not have an official result, but Biden appears to be on course to become president. In any case, we should not view this as a democratic victory. Although Biden could very well be the president, his party failed to gain a convincing victory overall.

The expected “blue wave” turned out to be a ripple. The party actually lost seats in the House of Representatives, in contrast to forecasts for them to gain seats. They will remain the majority party in the House, but they appear to have failed to take control of the Senate too.

Assuming that Biden wins the presidency but the Senate remains under republican control, we would have a split government and continued gridlock. I think this is one of the reasons for the US market’s positive reaction to the indicative results that we have seen so far. The markets tend to prefer democrat-republican gridlock to dominance by one side or the other.

In particular, the democratic platform would have implied increased regulation, increased taxation, and an increased focus on the monopolistic anticompetitive practices of the big tech firms that have led US markets higher for the past decade. With a split between the executive and legislative branches, it would be very unlikely for a President Biden to pursue such policies. So ultimately, the split results have benefited US stocks, especially mega-tech stocks and big healthcare.

For Vietnamese securities investments, a declining US dollar historically has been good for emerging markets and that might be the case again this time. The VND has been very stable against the dollar so I would say the macro implications for Vietnam would be neutral to slightly positive.

Another consideration is what a fall in the US dollar means for gold prices. Soaring gold prices might attract some domestic liquidity away from stocks and into gold, at least temporarily. So the weak dollar could be a mixed bag for Vietnamese stocks.

Of course, the longer-term case for investing in Vietnam will not change based on what happens in a US election or more specifically in the handful of states that have not yet reported a final election result. We thus remain structurally positive on Vietnamese stocks.