Stock market in June: Focus on cheap valuation

Expectations for VN-Index 

Several notable events occurred on the stock market (TTCK) during the midweek session. The spread of capital flow, including market liquidity surpassing 13,600 billion dong, is the first positive element, as is the width of the market, with hundreds of stocks hitting the ceiling, demonstrating the market's buoyancy.

Individual retail investors have begun to purchase net in the last two weeks, offsetting foreign investors' net selling. In the medium term, everything points to an upward trend, raising hopes that the VN-Index would break the 1,080-point barrier and proceed towards higher objectives such as the 1,100-point area.

According to Mr. Hoang, there are encouraging signals in terms of liquidity, pricing, and the VN-Index index, but there are still issues lurking beneath the surface. For starters, in the last two weeks, foreign investors have began to consistently net sell for more over 3,000 billion dong.

Second, there is excessive market enthusiasm when stocks with low prices reach their ceiling and climb rapidly, which is also a cause for concern at the moment.

Experts refer to the tale of the Federal Reserve (Fed) convening the FOMC meeting in June as one of the causes for the net selling of foreign investors. The Fed is still pursuing a high interest rate policy, whereas Vietnam's interest rate policy is trending in the opposite direction. This might put a strain on foreign investors' money flows.

Furthermore, after they have purchased a large number of stocks at low values, this may be the moment for investors to start taking profits.

Since the beginning of 2023, the policies of the Government and the State Bank of Vietnam (SBV) have been supportive, with the SBV lowering the operational interest rate for the third time in a row. However, we must still wait for good economic indications from measures such as the IIP and PMI.

The IIP index climbed by 0.1% in May to 2.2%, which is also an encouraging indicator, although there hasn't been much change fundamentally. Overall, despite policy support, the economy has not shown considerable progress. This will be a source of concern in the final six months of the year.

Focus on low-value securities

In June, investors will have to wait and see if the supporting measures have had a substantial impact and if the economy has recovered. If no major recovery occurs, the State Bank of Vietnam (SBV) may be forced to deploy more harsh support measures.

According to the analysts, the market will climb since policymakers predict a rebound. These hopes, however, must be reflected in the economy and proven by better indications of recovery.

The Consumer Price Index (CPI) is another encouraging component of the May data. The tiny increase of 2.34% suggests that inflation is not a big problem for Vietnam, since it is still on a downward path and remains low.

Mr. Hoang feels that the economy is moving in two distinct paths, depending on whether the SBV provides stronger support or maintains current stability. Savings accounts expiring between late 2022 and early 2023 may not be reinvested if the operational interest rate falls. Overall, this is beneficial to the stock market since capital may migrate into higher-yielding channels. However, it would put pressure on market liquidity and the economy by affecting banks' ongoing mobilization efforts.

As a result, Mr. Hoang feels it is premature for the SBV to lower interest rates further, especially given the next Federal Reserve (Fed) meeting on June 15-16. Recently, investors have grown increasingly confident that the Fed would raise interest rates by another 0.25 percentage point. If this is accurate, it might put pressure on the Vietnamese currency and foreign investment inflows.

Mr. Hoang notes that the stock market has surged since late 2022 owing to three key factors: low valuation, unexpected aspects, and policy expectations. Meanwhile, the intrinsic worth of the economy and enterprises remains in relatively unfavorable ranges in the absence of substantial adjustments or shifts in nature. As a result, the investing focus here is on low valuation, which is analyzed using P/B (Price-to-Book) and P/E (Price-to-Earnings) ratios.

Furthermore, it is critical to compare a company's previous performance to industry averages or to the stock itself. From a technical standpoint, we should consider the importance of price levels and accumulation zones.

Another essential factor to consider is that the market has been increasing since late 2022, and several equities have witnessed considerable price gains, resulting in a somewhat high-priced total market. If we pay closely, we will see that high-priced equities that have previously seen big gains may not do well during this period, and the market will continue to focus on the tale of low valuation.