How has the Russia-Ukraine crisis impacted Vietnam’s key sectors?

The conflict in Ukraine has exacerbated fertilizer shortages. This will be good opportunity for Vietnam.

According to the International Trade Center (ITC), Russia and Ukraine's total export value in 2020 was USD 337.1 billion and USD 49.4 billion, respectively, accounting for 2% of global export value. Oil and natural gas, iron and steel, fertilizers, wood, and grains are Russia's principal exports, whereas cereals, nuts, and animal/vegetable fats and oils are Ukraine's. The conflict in Ukraine disrupted supply chains, causing prices of oil, natural gas, fertilizer, and rice to rise, helping equities in these sectors outperform in the first quarter of 2012.

Despite significant progress in the current round of negotiations, Russia-Ukraine tensions may endure and continue to have an influence on the following sectors, according to KB Securities' base case scenario:

First, Russia is the world's third largest oil exporter, with a USD142 billion export turnover, accounting for 9% of total worldwide export value. The United States and its allies' ban on Russian fossil fuel imports will further constrain global oil supplies. Meanwhile, the rebound in travel, transportation, and trade following the pandemic could raise oil use in 2022. Furthermore, with significant oil exporters facing a lack of investment and OPEC's oil output still not entirely recovered from the pandemic, as well as geopolitical concerns and long-term sanctions, oil price hikes are expected to persist in the medium run.

Third, cereal (wheat, corn) shipments from Russia and Ukraine account for more than 15% of total global export value. Food supply disruptions caused by these two countries have harmed global food security, particularly in Egypt and Turkey. Wheat prices have risen by about 10% in the last month and by more than 72 percent in the last year, causing price hikes in other foods such as rice, oats, pork, and chicken.

Furthermore, Russia is the world's biggest fertilizer exporter, accounting for 13% of total worldwide exports, with ammonia gas (20% of total global exports), urea (15%), and potash fertilizer as the key exports (17 percent ). Russia, China, and Egypt have imposed export limit s until the end of 2Q22 to meet domestic demand, putting global fertilizer supply under severe strain. The conflict in Ukraine has exacerbated fertilizer shortages and pushed up food costs even more.

As a result, KB Securities believes that oil and gas stocks such as PV Gas (GAS), PV Drilling & Well Services (PVD), PV Technical Services (PVS), chemicals and fertilizer stocks such as PV Fertilizer & Chemicals (DPM), PV Ca Mau Fertilizer (DCM), Duc Giang Chemicals (DGC), and rice stocks such as Loc Troi Group (LTG) have significant upside potential if commodity prices remain high. The main sources of negative risk are a faster-than-expected de-escalation of the Russia-Ukraine war and lower commodities prices.

On the other hand, in KB Securities’ opinion, the Russia-Ukraine conflict has hurt the stock market for the following reasons: (1) the conflict has contributed to increasing inflation, policy rates, as well as less room left for loosening fiscal and monetary policies by the Government and the State Bank of Vietnam, thereby restraining the economic recovery; (2) the global supply chain of commodities, agricultural products, and energy has been disrupted, causing operating costs to surge, especially those in sectors like textiles, seafood, coal, livestock, transportation, and air; (3) consumer demand in the US and EU, Vietnam's main trading partners, tends to decline due to the war in Ukraine, which may level off the export revenue of enterprises with a high market share in these nations.

Inflation (measured by CPI YoY) and the VN-P/E Index's have an inverse relationship, according to historical data. During periods of low inflation, such as in 2007, 2009, and 2021, the stock market in Vietnam tends to climb, while during periods of high inflation, such as in 2008, 2011, and 2020, it tends to correct. Core inflation might rise by 3.8 percent YoY in the base case scenario, assuming the Russia-Ukraine situation calms down in the second part of 2Q22. As a result, KB Securities cut its forecast for the VN-forward Index's P/E by the end of 2022 from 17.5x to 16.5x in its annual report.