Strategy for long-term stock investment

A sound investment strategy is crucial. Investors should analyze market-affecting information with caution. This includes considering factors like news, economic indicators, and company-specific reports.

"The guiding principle" of the market

The long-term stock market performance is primarily driven by the profit growth of listed companies, assessed via EPS and, to a lesser extent, DPS. Investor sentiment, reflected in the P/E ratio, causes short-term market fluctuations. Optimistic investors drive up P/E ratios, while pessimism or risk aversion pushes them down. Therefore, sustained market growth hinges on companies' ability to increase earnings, while investor psychology influences short-term price movements. Both fundamental company performance and market sentiment are crucial for understanding market trends.

Research reports from UBS, Fidelity, Goldman Sachs, and JPMorgan all showed that in long-term periods (over 20 years), EPS and DPS growth are primary drivers of stock market fluctuations, accounting for a significant portion (80-90%) of market movements. Long-term stock valuations are less influenced by psychological factors. This suggests that focusing on a company's fundamental financial health, specifically its EPS and DPS growth, is more critical than attempting to predict market sentiment for long-term investment success.

From early 2013 to March 14, 2025, the VN-Index in Vietnam surged 220.5%. A significant 91% of this increase stemmed from rising profits, measured by EPS and dividends, contributing approximately 200% to the index's growth. Valuation changes (P/E ratio adjustments) played a minor role, accounting for only around 9% of the overall increase. This indicates that the Vietnamese stock market's growth during this period was primarily driven by fundamental improvements in corporate profitability rather than valuation increases.

Stock market performance hinges on a duality: long-term profitability and short-term volatility. Over the long haul, the market's trajectory mirrors the profit growth of its listed companies. However, in the short term, factors such as investor sentiment, the appeal of alternative investments, and other valuation influences introduce fluctuations. These elements can cause divergences between immediate market performance and the underlying long-term potential, highlighting the importance of considering both perspectives when evaluating investments.

Huynh Hoang Phuong, a stock analyst, said long-term investment decisions hinge on two primary factors: future earnings per share (EPS) growth and the current price-to-earnings (P/E) ratio. Investors should assess the potential for EPS growth to gauge a company's profitability trajectory. Simultaneously, they must evaluate the P/E ratio to determine if the market valuation is favorable for investment. A promising EPS outlook coupled with an attractive P/E ratio suggests a potentially sound long-term investment opportunity. Analyzing these two elements provides a framework for evaluating the long-term viability and valuation of investments.

EPS growth outlook

Over the long term (2012-present), the VN-Index generally fluctuates around its Earnings Per Share (EPS). The VN-Index dipping below the EPS line often suggests an undervalued market, while periods above the EPS line reflect overvaluation due to optimistic sentiment. This behavior has been observed during periods like 2017-2018 and mid-2021 to early 2022. Analyzing the VN-Index against EPS offers insights into market valuation and investor sentiment, serving as a useful tool for understanding market trends.

Currently, the EPS growth of the VN-Index for 2025 is projected at 18% (the average projection of Vietnamese securities companies and Bloomberg), and the VN-Index remains below the EPS, indicating that the valuation of the VN-Index is still below the historical average according to P/E. With a year of strong EPS growth and below-average valuation, the potential for the VN-Index to rise is high.

“The VN-Index is currently undervalued based on its price-to-earnings (P/E) ratio, as it is trading below its earnings per share (EPS). Projections for 2025 indicate a strong EPS growth of 18%. This combination of undervaluation and robust earnings growth suggests a high potential for the VN-Index to increase in value”, said Phuong.

The Vietnamese government's focus on high GDP growth until 2030, coupled with supportive policies for the private sector, is expected to positively impact business prospects and Earnings Per Share (EPS) growth. This forms a foundation for a favorable outlook for stock investments in Vietnam over the medium to long term.

Investment story in 2025

EPS growth is a key indicator for investment outlook, offering insights at market, industry, and stock levels. In Vietnam, stock companies and investment funds' forecasts predicted robust EPS growth in 2025, particularly in real estate, construction materials, consumer goods, retail, securities, and banking sectors. These sectors are expected to experience a strong recovery.

“Most of these sectors with low valuations at the beginning of this year and strong Earnings Per Share (EPS) growth projections are expected to attract investment in 2025. These sectors present opportunities as investors chase higher returns,” stated Phuong.

In Phuong’s opinion, short-term volatility in the VN-Index is expected due to international uncertainties, particularly US tariffs, which may narrow market valuations and affect EPS growth. Long-term performance, however, will be largely driven by domestic policies. Investors are advised to monitor both international and domestic developments to capitalize on short-term market swings for mid- and long-term investment strategies.