Positive ratings can reinforce outlook for economy

Tran Duc Anh, Head of Macro and Market Strategy KB Securities Vietnam

We have lowered our forecast for the VN-Index at the end of 2022 to 1,418 points (from 1,680 points at the end of the second quarter). It is based on the baseline scenario that the US economic recession will not take place in the last two quarters of the year despite the existing risks. This is in line with the aggregate forecast of financial institutions around the world that the likelihood of a US recession is above 40 per cent.

More specifically, we maintain our forecast of average earnings per share growth of listed companies on the Ho Chi Minh City Stock Exchange at 15.1 per cent while the 2022 target for the price-to-earnings ratio plummets to 14.3x from 16.5x in the second-quarter report to reflect heightening external risks.

In the second half of the year, the market will be mainly driven by the good resistance of the economy to heightened external risks as well as the profit growth momentum of listed companies. We expect the market will soon enter a short-term recovery in the third quarter in response to the positive macro indicators as well as the second-quarter earnings reporting season, especially after a deep correction in the highly cyclical stocks such as banking, securities, real estate, and related sectors.

The scenario of the market successfully creating a medium-term bottom in the third quarter is not highly appreciated. The market can only really return to a long-term and sustainable uptrend when the external risks are removed, especially the risks of US economic recession, inflation, and the Fed raising interest rates.

Besides the likelihood of a US economic recession, there are some other risk factors affecting the market including inflation (especially in the late third quarter and early fourth quarter), exchange rate fluctuations, domestic economic growth, and risks from the corporate bond market. Attention should also be paid to the State Bank of Vietnam’s monetary policy, the pandemic restrictions in China, and the Russia-Ukraine conflict as well as oil price movements.

As for the industry outlook for the second half of the year, we give a positive rating to the fields of real estate, power, IT, retail, seafood, and oil and gas.

Vietnam’s stock market dropped sharply in the first half of the year, especially in the second quarter after the sideways period in the first quarter due to the negative movements of the global stock market. The negativity is attributed to increasing concerns about the risks of the US economic recession under the impact of the Fed’s tightening of monetary policy and soaring inflation.

For the first half of 2022, the VN-Index plummeted by 22.5 per cent points, while the average trading value decreased by 5 per cent over the same period.

Although the trading value increased on-quarter significantly, the cash flow targeted some sectors in the wake of the general market moving sideways with a substantial divergence. It was contrary to an overall upward trend in 2020-2021 in which sectors like construction materials, chemicals, and fisheries attracted the highest cash flow thanks to surging commodity prices amid recovering demand and conflict in Ukraine..

In our view, the stock market’s cash flow may decrease marginally from the high levels in late 2021 and early 2022 due to capital withdrawal for production and business activities after lockdowns. However, it is less likely to fall sharply in the second half of this year and is expected to be higher on-year given the low policy rate despite possible modest increases, combined with the attraction of the stock market compared to other investment channels, such as gold and real estate.

Vietnam’s stock market is undervalued despite the health of both the macro and micro business foundations. We believe this valuation gap will close soon if the market upgrade prospects become clearer (the process is expected to take place in the next 2-3 years), reflecting the positive outlook of the market in the long run.