Unswayed by global volatility

Chris Kamm, president of Kamm Investment Inc

This year has the propensity to be a favourable one for the Vietnamese stock market. Following what we witnessed in 2018, when most stock markets retreated, and most global markets will continue to experience muted performance.

Though it may seem odd, it is often said that in stock markets a bad year always follows another. This adage comes from the fact that a falling stock market usually precludes future economic weakness which manifests itself possibly six months to a year later and results in further stock market weakness. As last year was lacklustre, it would seem then that 2019 might also be challenging. In support of this, the compelling reason for subpar stock market performance is that there is uncertainty concerning global economic growth.

Until it is certain that global growth has not completely stalled, most institutional investors will remain on the sidelines. In the third quarter of 2018, global growth appeared to slow enough to cause sentiment to change from wildly bullish to mildly and later terribly bearish, in the process dragging global markets down to annual lows. The markets in the US contracted an amazing 13 per cent in three weeks in December, which has been unprecedented since the Great Depression. Other world stock markets also retrenched in the final weeks of December to finish the year in negative territory.

As most stock markets around the world remain close to or in bear markets (defined as a decline of 20 per cent from their respective highs,) it seems obvious that global economies have slowed. It is expected, for example, that the GDP for the European Union will contract in 2019. Even in the US, GDP will likely not meet certain expectations as trade tensions and the government shutdown have derailed corporate investment.

Further evidence can be found in China, which reported GDP in 2018 to be the lowest in 20 years. This evidence points clearly to a slowing global economy, but by how much will it truly recede? Recessions are not certain in any economy. If the global economic growth picture can improve, it is possible economies as a whole can escape possible recessionary conditions. The market retrenchments that occurred in 2018 can lead first to market stabilisation and then to market price appreciation.

With the current inability to quantify the effect of lower GDP, investment professionals have taken the view to remain neutral until evidence of a recession or growth presents itself. Likely, such evidence will present itself in the first six months of 2019. Some countries will seem to be immune from the slowing economy, at least to some degree.

The Vietnamese stock market will likely have an above-average year in 2019 Photo: Le Toan

Prospects for Vietnam

Regardless of a world recession or not in 2019, the case can be made that the Vietnamese economy should remain relatively robust and experience stock market gains. This is largely due to the phenomenon which occurs when recessionary pressures grip developed economies.

Corporations search for more advantageous and cost-effective means of production. These pressures cause corporations around the world to search out lower-cost production in order to maximise return on investment. Without question, this will lead, as it had in the past, many multinational and international corporations to seek production in Vietnam.

Of course, this is a natural occurrence in international business that we are all aware of. The shifting of means of production to lower-cost countries remains a chosen method of lowering production costs for companies based around the world. Many have witnessed companies from the US, for example, shift production of goods from China to Vietnam. But it is during a time of recessionary pressure that corporations are more active in their endeavours to lower cost and therefore from the perspective of an economy, which depends on foreign direct investment (FDI), this is clearly favourable.

Even if a global recession is averted, Vietnam should be a further recipient of investment interest which will further economic growth in 2019. As Vietnam becomes less reliant of FDI, in future years, the benefit will become muted. But currently Vietnam relies heavily on that overseas investment to lead to higher economic activity and growth.

The trade tensions between the US and China have garnered much attention over the last six months. In fact, the trade tensions of many countries against the US have garnered a tremendous amount of attention. Economists stand on both sides of this issue, with some calling for recession while others call for greater economic activity.

Regardless, embedded in the trade tensions is economic uncertainty. This uncertainty has caused international corporations to delay or outright curtail international investment. It has caused investors to question the ultimate effects of such trade tensions. Clearly, no-one knows the cost of the trade tensions to the economy, though it will surely result in lower GDP. Much like in 2018, worldwide investors will be watching for the softening of these trade tensions and a hopeful resolution to the issues at hand.

Although it has been argued that these tensions and the resultant tariffs have hindered economic growth around the world, the evidence points to the opposite. Most countries suffer from trade tensions and tariffs. In some cases, tariffs can have a stifling effect on a country and its economy. Countries possessing economic cost advantages in production and location have benefitted from the trade tensions. One such country that has such benefits is Vietnam.

The country should remain a beneficiary of these trade tensions. Being a lower cost producer of the world’s goods and services, Vietnam is in an enviable position. In the US, for example, many international corporations have announced plans to reduce production in China due to the uncertainty and move production to countries such as Vietnam.

As it is a natural fit and certainly economic evolution, these corporations can see a long-term solution to the trade tensions which does not involve China and the US. As corporations embrace strategies such as these, Vietnam will again be the beneficiary of further FDI, which results in more production of goods and services, and therefore greater economic growth.

Following a lacklustre year in stock market performance, it is common to view the stock market as a subpar investment. Without question, after suffering losses in 2018, such a view is easily justifiable.

However, it is possible to take a different view. Regardless of the events which may or may not cause a recession across the world as a whole, Vietnam should experience above-average stock market performance as it will benefit from the two major issues causing uncertainty in the world today.