Vietnam moves several steps closer to market upgrade

However, the MSCI has had an improvement in its rating for the transferability criterion on the back of increased uptake for off-exchange and in-kind transactions following various regulation changes.

Tran Thi Khanh Hien, director, Research Division, MBS

Furthermore, Vietnam continues to work on market development plans to address certain accessibility issues, such as foreign ownership limits, pre-funding requirements, and the lack of English disclosure of market information.

The recent estimate by the World Bank suggests that if Vietnam were upgraded to the group of emerging markets, it could attract approximately $25 billion in new investment from foreign investors (both active and passive investors) into the Vietnamese market by 2030.

This influx of new capital is expected to enhance both the market’s scale and also liquidity, similar to the experiences of other markets that have undergone upgrades.

Looking at the previous decade globally, most stock markets in various countries experienced strong growth within just a year of being upgraded by MSCI from frontier to emerging market status.

The United Arab Emirates and Qatar both saw significant increases in their indexes, up 39 and 51 per cent respectively within one year after their upgrades in 2013. Pakistan and Saudi Arabia were similar, but Kuwait was an exception, primarily due to the pandemic.

But despite short-term volatility driven by unexpected factors during the upgrade period, positive fundamentals tend to prevail in the long run, as what also occurred with Kuwait.

This year, there is rising optimism but still risks on the horizon for Vietnam’s stock market. The VN-index ended June at +10.2 per cent year-to-date, still among top performers in regional markets. The strong rally thus far has led some investors to question if the market has peaked. We still see some positive catalysts to support for the market uptrend into the second half of the year.

Firstly, we get closer to a pivot by central banks away from tight monetary policy. The European Union has become the second major global economy (after Canada) to cut its lending rate in June, from an all-time high of 4 to 3.75 per cent.

Though several debates on when the US Fed’s policy rate will be cut down, we expect two cuts at some points, bringing the rate down to 5 per cent by the end of 2024, which will favour emerging markets like Vietnam.

Secondly, we see the economy recovery still bodes well for market expansion. The Q2 performance of Vietnam’s economy exceeded most market forecasts, accelerating from an upwardly revised 5.87 per cent on-year rise in Q1.

Vietnam’s exports and foreign direct investment inflow this year are outliers, which reaffirmed our view that global demand recovery likely to bolster domestic consumption in the near term.

The surprising Q2 performance prompted us to upgrade our 2024 GDP forecasts to 6.5 per cent from the previous 6.3 per cent. We expect the economy growth upturn will become stronger with 6.6 and 6.5 per cent on-year in Q3-Q4, respectively, fuelled by export growth and manufacturing expansion, as well as much more effective public investment disbursement.

Thirdly, the rebound in the macro outlook suggests a 20 and 15 per cent growth of 2024 and 2025, respectively, forward market earnings. After a modest growth of only 5.3 per cent in Q1, we expect that market aggregate earnings growth to rally 9.5 per cent on-year in Q2, 33.1 per cent in Q3, and 21.9 per cent in Q4.

Key drivers for market earnings improvement for the whole of 2024 will come from the solid performance of banks, retail, construction materials, and power. For the following year, the market earnings growth likely decelerate to 15 per cent, but bolstered by banking, construction materials, industrial parks, and power.

We expect the VN-index will extend further its uptrend towards 1,350-1,380 towards the end of 2024, bolstered by a robust recovery in market earnings growth, low interest rate environment, and stronger confidence in the Fed’s rate cut.

However, risks are tilted towards the upside. Having depreciated by 4.7 per cent in the year-to-date against USD, the VND is among the region’s worst performers. Vietnam’s negative interest rate differential with the US has been a key factor.

Though the DXY is expected to lose it strength this year following Fed rate cuts, a prolonged weak VND will pose upside risks to inflation that is already near the central bank’s 4.5 per cent target.

Additionally, the prolonged heavy net-sold activities of foreign investors will cause a pullback in terms of Vietnam’s market valuation.

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