What continues to drive the Vietnam stock market?

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>> VN-Index to struggle at 1,060 points due to weak demand force

According to KB Securities, there will be four major Vietnam market drivers in 2023, including:

First, Vietnam and China have a close trade and service relationship, so the opening of China's economy will be a driving force for Vietnam's economic growth and partly undermine the bad impacts from sagging demand in the US and EU. Accordingly, Vietnam's equity market also benefits, especially for industries that have close trade activities with China, such as textiles, fisheries, retail, rubber, cement, and rice; industries that benefit from the recovery trend of raw material prices when China's consumption recovers, such as steel and oil & gas; and industries that cheer the return of Chinese tourists, such as airlines, tourism services, and resort real estate.

However, Mr. Tran Duc Anh, Head of Macro & Strategy at KB Securities, said the opening of China would increase pressure on global inflation, thereby raising difficulties in the fight against inflation in the US and EU and affecting the decisions of the Fed and the ECB.

Second, the Fed's monetary tightening move in 2022 caused the global stock market to wobble. The stock markets of emerging countries, including Vietnam, are further affected by a stronger dollar and rising exchange rate pressure, which forced central banks to tighten monetary policy.

However, in Mr. Tran Duc Anh’s view, some signs have shown that US inflation has peaked while the US economy is gradually weakening. This raised expectations that the Fed will start easing monetary policy by the  end of 2023. The focus is on whether US inflation tends to fall as quickly as expected (given that commodity prices may rebound when China opens up) and how severe the US economic recession is if it happens.

Third, Mr. Tran Duc Anh observes a high correlation between M2 money supply growth and VNIndex's P/E valuation. In fact, the record-low M2 increase in 2022 stressed market liquidity, the banking system, and the whole economy and pushed interest rates to a high base. This is the main reason for VNIndex’s negative movements. It is expected that money supply growth in 2023 will recover from the low base of 2022 while some favorable conditions, such as the State Bank of Vietnam’s (SBV) ability to buy USD or public investment, are encouraged.

>> VN-Index to increase by over 20 per cent this year: VinaCapital

Fourth, the corporate bond market is likely to face many difficulties in 2023. The real estate market is subdued but does not collapse systematically, and more supportive actions from the government can be expected.

VN-Index is going to 1,100 points

Based on the analysis of the four market drivers, Mr. Tran Duc Anh built a scenario with the highest probability for each factor: 1) China's production and business activities return to normal in 2Q23, which could benefit Vietnam's economy but not put too much pressure on global inflation. 2) The Fed may start lowering interest rates in 4Q when the US economy falls into a slight recession and the USD cools down. This fact might increase the flexibility of the SBV policy. 3) The M2 money supply growth rate is close to its pre-COVID level, which contributes to the average interest rate being lower.4) There is no widespread disruption in the corporate bond market. Accordingly, the market EPS is forecast to increase by 8.5%, and the P/E of the VNIndex is closer to neutral at 12x (according to the correlation model M2, interest rates, and P/E of the VNIndex), which corresponds to the reasonable range of the VNIndex at 1,240 points at year-end 2023.

Besides, Mr. Tran Duc Anh said there would be a negative case in which the above factors turned out unfavorable, such as global inflationary pressure increasing again, the FED having to tighten monetary policy to cope with rising inflationary pressure, the SBV continuing its tightening monetary policy, and more obstacles on the corporate bond market. Correspondingly, the market's EPS may drop 8%, and the P/E of the VNIndex should be around 10x. Therefore, the negative scenario of the VNIndex at the end of 2023 is 880 points.