Recalibrating investment strategies

VN-INDEX fell to 1,132.1 pts, the lowest level in 20 months, a decline of 11.6% monthly and 24.4% annually. 

>> The VN-Index is under downward pressure

With rising interest rates and increasing downward pressure on the VND, the market didn't see any relief in September 2022. The State Bank of Vietnam began raising its policy rate by 100 basis points on September 23, the first increase since late 2011. Additionally, due to upward pressure on the USD, the VND has fallen by 4.5%. VN-INDEX fell to 1,132.1 pts, the lowest level in 20 months, a decline of 11.6% monthly and 24.4% annually. Three bourses' combined average trade value fell 14.0% mum and 40.5% yoy in September. Notably, with an outflow of VND3,641bn, foreign investors turned into net sellers.

In the upcoming quarters, high leveraged corporates' earnings prospects may be harmed by rising loan costs and weak global demand. "We still expect listed corporate earnings to expand by 23% yoy in FY22, but we expect some FY23 earnings to be downgraded after the 3Q22 data are announced," stated VNDirect.

The key question is whether these headwinds have been appropriately priced into the markets. VN-Index was trading at 12.2x trailing P/E as of September 30, which is 31% below its peak and even lower than the average P/E of 16x between 2017 and 2019, when deposit rates were higher.

According to VNDirect, the VN-Index now provides valuation buffers. "We calculate the current profits to VN-INDEX to be approximately 9.3% based on our prediction of 23% yoy earnings growth. In addition to the 1.7% dividend yield, the market earnings yield is predicted to be around 11.0%, which is still competitive with commercial banks' 12-month deposit interest rates (which are expected to average 6.4-6.5% by the end of 2022F)”, said this stock firm.

In October, VNDirect is still being more cautious due to the impending market turbulence. Early October will see the start of the 3Q22 earnings season, and good news typically comes first. Due to the low base from last year, it anticipates substantial yoy earnings growth in the travel and leisure, automotive, retail, and food and beverage sectors. The market anticipates the release of US inflation data on October 13 as well. VNDirect is cautiously predicting that the VN-INDEX will oscillate between 1,050 and 1,180 points in October because there are no significant catalysts for the gain.

In VNDirect’s view, the proportion of stocks in the portfolio should remain at a moderate level, about 50-70% of the portfolio is stocks. In addition, investors should limit  the use of margin at the moment to minimize risks. Downside risks to the market include: (1) Inflation in the US fell more slowly than expected, (2) Fed raised its policy rates faster than expected and (3) the US dollar continues to strengthen, putting more pressure on Vietnam’s exchange rates, interest rates and foreign investment.

In light of the possibility that high interest rates may persist in the near future, it is wise for investors to switch to income plays and undervalued investments. VNDirect recommends exposure to stocks that have net cash per share but are traded below book value because they may provide a higher margin of safety.