What outlook for VN-Index?

The VN-Index climbed by 10.2% in the first half of 2024, exceeding other frontier and emerging markets, according to Rồng Việt Securities' (VDSC) recent evaluation.

Some aspects of the stock market in the first half of the year can be described as follows: Foreign investors were net sellers, as is typical in frontier and emerging markets; local individual investors, on the other hand, were net buyers and were the market's dominant participants.

Against the backdrop of sustained profit recovery from late 2023 to the first quarter of 2024, as well as continued reductions in deposit interest rates within the economy as a result of monetary policy support from regulators, VDSC notes that the investment yield differential between the stock market (E/P) and traditional investment channels has become more attractive than in the past. This has resulted in a massive influx of new investors into the market in the first half of 2024, accompanied by large capital inflows that are fueling the market's upward pace.

The stock market fluctuated during the second quarter, but the upward trend was sustained mainly to domestic capital inflows. As a consequence, at the conclusion of the first two quarters, the stock market had increased by more than 10%, over 11% more than the same period last year and only slightly lower than the VN-Index's explosive period in the first half of 2021 (over 27%). Meanwhile, during years with negative returns, such as the first half of 2020 and the first half of 2022—times affected by the pandemic and its aftermath—the stock market has been the best-performing investment channel relative to its own performance in the same timeframe.

According to statistics, in the first six months of 2024, the return rate of industry groups recorded a widespread increase across almost all sectors: 18 out of 20 sectors had positive returns. This may be one of the driving factors behind the continued sharp increase in the number of domestic investor accounts.

The latest data from the Vietnam Securities Depository (VSD) recorded that the number of domestic investor accounts increased by nearly 330,000 in July 2024, tripling from the previous month and marking the highest level in two years. This was the third-highest number of stock accounts recorded in Vietnam's history, following the period of May-June 2022, despite July witnessing a phase of market volatility and the VN-Index facing strong resistance around 1,300 points. As of the end of July, the cumulative total of domestic stock accounts reached over 8.33 million, meaning more than 8% of Vietnam's population now holds stock accounts.

The appeal of the stock market in the second half of the year to investors is expected to continue. Based on the recovery momentum of business results in the first half of 2024, VDSC projects that profit growth will accelerate significantly in the second half of 2024, with an estimated increase of 25% year-over-year. Growth drivers will include:

The banking sector will continue to lead growth due to (1) the economy's expansion needs, allowing credit growth in 2024 to potentially reach 14%-15% year-on-year, and (2) a slight decrease in bad debt by the end of the year as banks are in a better pre-provision profit position than in 2023, allowing them to absorb and clean up balance sheets. Economic recovery also alleviates the burden of new bad debts accumulating and speeds up the settlement of collateral for bad loans.

The real estate sector is expected to contribute significantly to profit growth in the second half, based on the low base of the same period last year, as major developers such as VHM, KDH, and NLG focus on delivering products previously sold.

For other sectors with substantial contributions to profit growth, according to VDSC, industrial goods and services, retail, and aviation stocks will be the main highlights contributing to the overall growth picture due to (1) a positive outlook for industrial production, (2) improved profit margins as the price war ends in the retail sector and input costs decrease in the consumer goods sector, and (4) aviation companies reporting the second consecutive quarter of positive profits thanks to increased prices and volumes.

The stock portfolio evaluated by VDSC is expected to expand at a year-over-year pace of 19% in 2024. Simultaneously, a regression analysis of bank asset growth and market growth was used to calculate the market's asset growth rate in the second half of 2024. The asset turnover ratio and profit margins of the sectors were calculated using a time series technique that accounts for seasonal influences. As a result, VN-Index's after-tax profit is expected to climb by 18% year on year.

With the aforementioned profit growth prospects, the stock market's yield will continue to improve at the current market capitalization. Additionally, the current yield differential (E/P of the stock market compared to government bond yields) of 4.53% is significantly higher than the 5-year average and falls within a region of relatively low probability (7%).

"We believe that in the long term, under normal conditions, this differential will fluctuate around the average level to reflect the risk premium between asset classes. Yield differential fluctuations beyond the standard deviation (1 standard deviation) usually result from the market overreacting to headwinds and will return to the mean as short-term headwinds pass.

According to VDSC, yield differentials greater than 4.0% frequently emerge amid unanticipated headwinds and pass rapidly, allowing the market to rebalance and recover. As a result, with EPS growth in the last four quarters (up to Q2/2024) of 10% compared to the cumulative EPS of the last four quarters (up to Q4/2023), the index's reasonable P/E range in Q3/2024 could be 14x - 15x (corresponding to a yield differential of 3.5% - 4.0%), equating to a balanced VN-Index trading range of 1,237 -1,325.

Over a longer term, based on profit growth expectations (14%-18%) and a P/E trading range of 13.5x - 15x, the fair range for the VN-Index after considering full-year 2024 company profit growth results is 1,236-1,420," the research team said.