Strong financial base required for stock expansions

Strong financial base required for stock expansions, illustration photo

Low interest rates in the past five years in Vietnam and worldwide have greatly supported cash flows heading into the stock market. This has been evidenced in the number of new securities trading accounts, stronger market liquidity, and investors’ deposit balances at securities companies.

Data from market research firm FiinGroup shows that in the four stock groups of banks, securities, steel, and real estate which have rocked the market, cash flows from retail investors into steel and securities stocks decreased slightly while funds going into bank stocks remained stable.

According to FiinGroup, gold and the US dollar are no longer investment priorities for young Vietnamese investors. These investors boast more extensive investment knowledge and have access to real-time data through applications and have accumulated a lot of experience in stock investment over the years.

Cash flows, including those from selling securities, are expected to stay in the stock market until at least the end of the first quarter of 2022 when production and business activities are restored to 50-60 per cent of the pre-pandemic level, FiinGroup said.

“In terms of gold, the domestic gold price premium is at a record level of VND9-10 million ($390-435) per tael, putting physical gold investors at great risk. For the US dollar, the current zero interest rate on USD deposits, abundant foreign currency supply, as well as the low likelihood of VND devaluation in the context of Vietnam’s strong foreign exchange reserves would make USD holdings no longer profitable but only a reserve,” FiinGroup noted.

Furthermore, the current effective deposit interest rate is only 4.4 per cent (average for all terms), far below what is on offer by other investment channels.

Real estate remains quiet due to social distancing. Yield from real estate leasing is very low because the demand for retail, business, and residential premises all dropped sharply after four COVID-19 lockdowns while property prices remain high.

BIDV Securities stated that the accelerating pace of public investment disbursement could also boost the economy. “Related stocks will definitely soar in the last months of the year,” it said.

The current valuation of stocks is rather cheap relative to the earnings forecast for 2021 and even 2022. Some analysts believed that these forecasts will be difficult to achieve because of COVID-19.

However, except for travel and leisure, there are plenty of opportunities for leading companies with strong financial base to expand market share and improve operation efficiency.

“Most importantly, under the current circumstances, a high valuation does not necessarily imply an impending market correction. It comes mainly from demand as evidenced by new cash flow and investor sentiment, instead of purely corporate fundamentals and earnings prospects,” FiinGroup added. “On the other hand, ‘cheap’ valuation does not hint at a coming uptick if there is an absence of money inflows or weak investor sentiment.”

Given underlying fundamentals, short-term growth outlook, and supply-demand dynamics, there are a handful of sectors which are expected to become bright spots, including steel, chemicals, industrial goods and services, food products, construction and materials, and banks, as well as insurance and securities brokerage.

In addition, experts remain positive on the prospects of a variety of industries, including technology hardware and equipment, utilities like water and electricity, packaging, and logistics.

On the other hand, Petri Deryng, founder of PYN Fund Management, noted that the recent Chinese liquidity crisis and the dismal situation of Evergrande, the second largest property developer in China, has robbed investors around the world of their peace of mind.

In general, the VN Index is up 40 per cent since the beginning of 2020, but is only about 12 per cent above the highs of 2018. Deryng forecast the VN-Index to move in line with the earnings growth of listed companies.