What will continue to drive Vietnam's stock market?

Despite the large number of stock market accounts opened over the last 18 months, the proportion of Vietnamese people who invest in the stock market is still fairly small.

Mr. Michael Kokalari, CFA Chief Economist expects investor participation in the stock market to continue growing vigorously in the years ahead. Despite the large number of stock market accounts opened over the last 18 months, the proportion of Vietnamese people who invest in the stock market is still fairly small. If Vietnam follows a similar trajectory as Taiwan, the number of stock market investors is likely to increase three-fold over the next ten years.

Next, despite last year’s remarkable rise in corporate earnings, a further 26% increase in earnings will be expected this year. The bull markets that are driven by earnings growth are healthier and more sustainable than those that are driven mainly by P/E multiple expansion.

"We also observe that many of Vietnam’s retail investors, who currently account for circa 90% of the daily trading volume on the stock market, seem focused on trading with a short-term view. For that reason, active fund managers with a proper investment methodology that anticipates stock and/or sector rotations and can accurately anticipate the earnings growth of individual companies are well positioned to outperform the VN-Index (VinaCapital’s flagship VVF UCITS fund outperformed the VN-Index by over 12%pts in 2021)", Mr. Michael Kokalari said, adding that VinaCapital’s current investment strategy remains focused on identifying stocks and sectors that benefit from the economic recovery that is already underway in Vietnam, including consumer discretionary, financials, and real estate. In addition, since Vietnam’s long-term growth drivers have remained intact despite COVID, VinaCapital also continues to focus on stocks and sectors that are beneficiaries of FDI inflows, infrastructure development, clean energy, and digitalization.

In 2022, VinaCapital is particularly focused on the banking sector (which has a circa 30% weighting in the VNIndex), property (which has a 23% weighting), and consumer discretionary stocks (which have a circa 3% weighting), which should benefit from both cyclical and secular tailwinds this year.

Banks’ earnings are likely to grow by about 30% this year, driven by 14% credit growth, and the fact that Vietnam’s banks are less likely to be impacted by COVID in 2022. Specifically, asset quality issues should have less of an impact on banks’ earnings, and Mr. Michael Kokalari does not expect banks to sacrifice profitability to help support the economy (e.g., by offering concessionary lending rates) again in 2022.

Furthermore, two ongoing trends will support Vietnamese banks’ profitability in 2022: (1) an improving loan mix (i.e., more retail and SME loans), and (2) lower funding costs, driven by a higher contribution from low-cost current account and savings account sources. In addition, the Government’s NPL forbearance measures will enable banks to spread their loan losses from COVID over three years, which will support banks’ profitability this year. "We are not overly concerned about asset quality issues. We estimate that more than one-third of the loan losses that banks could eventually suffer from COVID have already been provisioned against, as well as the fact that a high proportion of loans are backed by real estate collateral—and property prices have continued to climb over the last two years", Mr. Michael Kokalari noted.

Next, Mr. Michael Kokalari expects the earnings of real estate development companies to grow by nearly 25% in 2022, driven by a near-doubling of sales/pre-sales of new housing units following a drop of more than 50% in 2021 because of the COVID lockdowns, as well as legal and regulatory issues that are now starting to be addressed and resolved. In addition, the earnings of real estate firms that have recurring revenues (e.g., real estate brokers and shopping mall owners/operators) are also set to rise this year.

Continued enthusiasm for investing in real estate – thanks in-part to the low deposit rates banks pay savers – should ensure that property prices continue to increase in 2022 (VinaCapital estimates that apartment prices in Hanoi and HCMC rose by about 10% in 2021). "The continued increase in real estate prices and a pent-up demand to purchase homes to live in or for investment purposes will drive the above-mentioned, anticipated jump in the pre-sales of new housing units in 2022", Mr. Michael Kokalari believed.

Finally, consumer spending should continue rebounding in 2022. "We believe the pandemic has accelerated the trend of consumers shopping in the modern retail channel as well as e-commerce. That said, incomes were severely hit during the pandemic, so some consumers are likely to shift to cheaper products, resulting in some non-essential or high-end goods not recovering to their pre-COVID sales levels this year", Mr. Michael Kokalari said.

Even though Vietnam’s stock market was up 36% in 2021, dispersion among sectors and stocks was quite high. Mr. Michael Kokalari expected that there would continue to be winners and losers in 2022, which is a compelling reason for investors to trust a professional investment manager with their equity investments.