Threat of US recession: Impacts on Vietnam stock market

In the negative scenario where the US enters a recession, the P/E of the Vietnamese stock market will be 25% lower than the five-year average, equivalent to 10x.

>> Concerns about U.S economic recession

At its July policy meeting, the FED raised benchmark interest rates by 75 bps to 2.25- 2.5%, the sharpest increase since 1994, to tame inflation. At the same time, the FED also pointed to shrinking assets by nearly USD50 billion monthly from USD 9,000 billion, starting June 2022.

The US inflation (which is greatly influenced by oil price movements) is currently of top concern and a decisive factor in the FED's monetary policy and the recession risk. Against the backdrop of spiraling oil prices stemming from the conflict between Russia and Ukraine, Mr. Tran Duc Anh, Head of Macro & Strategy at KB Securities finds the US current situation similar to the period of the oil crisis in 1973-1974. At that point, after the Arab-Israel war, Saudi Arabia enacted an oil embargo against various countries supportive of Israel, including the US. Oil prices quadrupled and maintained at USD11.2/barrel for two quarters, causing inflation to rise sharply to 7.4% at the end of the third quarter of 1973. It prompted the FED to aggressively hike the interest rates to 10.5% and push the US into an 18-month recession before inflation was brought under control.

Based on the 2 year- 10 year yield curves, the probability of US economic recession over the next 12 months is increasing, from 22% at the beginning of the year to 40% after the first two quarters, in line with the consensus of financial institutions.

Mr. Tran Duc Anh said the FED's tight monetary policy would increase the US economic recession risk since high interest rates would seriously affect the business activities of enterprises using large loans as leverage. Along with that, high inflation also negatively affects domestic consumption demand. Therefore, the market related to the US economic recession risk is based on two scenarios.

>> Will economic recession kill off inflationary pressure?

In base case scenario, the probability of a “soft landing” for the US economy is more than 50%. Accordingly, inflation will not surge in the time ahead, and interest rates will approach 3- 3.25% by the end of 2022 as expected. Besides, the US economy is strong enough to withstand interest rate hikes without dragging into an econiomic recession. In this scenario, the negative impact of the Fed's interest rate hikes on the macro economy and the health of Vietnamese listed companies is limit ed. As a result, Vietnam's stock market will maintain high growth potential thanks to a bettering macro-fiscal foundation.

In the pessimistic scenario, the conflict between Russia and Ukraine continues to prolong, causing disruptions in the supply chain of petroleum, gas, fertilizer, and food products. As a result, inflation would increase hotter than expected and show no sign of peaking, forcing the FED to raise interest rates more aggressively than the base case scenario to 3.5%-3.75% at minimum at the end of 2022. Rate hike, high inflation, and contractionary fiscal policy will likely push the US economy that has just recovered from the COVID-19 pandemic into a recession.

The US has experienced seven economic recessions lasting from six to 18 months since 1970. The S&P 500 recorded an average drop of 21% over the period and slammed by 41% between 1973 and 1975 due to the recession. Despite different macro contexts, Mr. Tran Duc Anh believes that the US stock market can drop by 25% from its peak in case of an economic downturn.

Vietnam recorded import-export turnover/GDP at 185% in 2021, thanks to its high economic openness. In particular, the US is the leading export market with an export turnover of USD96.3 billion, accounting for 28.6% of the country's total export turnover. The economy recession in the US will negatively impact the health of the Vietnamese economy in general and the business activities of listed companies in particular. Mr. Tran Duc Anh said that in the negative scenario where the US enters a recession, the P/E of the Vietnamese stock market will be 25% lower than the five-year average, equivalent to 10x.