What will drive Vietnam’s stock market in 2H22?

Vietnam's stock market has long been "undervalued" in comparison to other markets

>> The VN-Index is under downward pressure

After fluctuating the previous quarter, the VN-Index fell over the second quarter of 2022 because the Fed's rapid rate hikes and the US economy's risk of a recession increased, putting pressure on international stock markets.

Given low P/B and low P/E in comparison to other regional stock markets, the Vietnamese stock market has maintained its allure. Notably, foreign investors were net sellers in regional markets and net purchases amid the VN-severe Index's corrections.

Vietnam's stock market has long been "undervalued" in comparison to other markets because it is still a frontier market, despite the country's macroeconomic situation being stable and the significant earnings growth of listed companies. According to Mr. Tran Duc Anh, Head of Macro & Strategy at KB Securities, the valuation difference will close upon market reclassification, which is anticipated over the course of the following two to three years and indicates the market's optimistic long-term perspective.

After deep corrections in the second quarter, the end-2022/trailing 12-month forward P/E is 13.2x. Based on KB Securities’ VN-Index EPS growth forecast of 15.1% YoY for HSX-listed companies, the 2022 forward P/E of the index should be 12.2x. Statistically, there were only three times when the forward P/E was below 12.2x: (1) In 2012 due to macroeconomic instability following the great recession during 2007-2009; (2) In late 2015 and early 2016 amid rising worries of a hard landing for the Chinese economy and the Fed’s rate hike for the first time after the financial crisis; and (3) In early 2020 given the COVID-19 pandemic.

In brief, steep declines in the stock market were all associated with rising concerns about global economic growth, which explains the correction of the local stock market over the last quarter.

“We maintain our forecast for the average EPS growth of companies on the HSX at 15.1% YoY (lower than the Bloomberg consensus of over 20% - See also Section II. Production and business activities). Moreover, we downgrade the index's 2022 target P/E from 16.5x (in the 2Q2022 strategy report) to 14.3x due to rising concerns about the US economic downturn. The VN-Index, therefore, should approach 1,418 points by the end-2022”, said Mr. Tran Duc Anh.

P/E of VN-Index

Specifically, in the context of post-pandemic recovery of the global economy, the reasonable P/E of the VN-Index is 16.5x (equivalent to the average P/E of the last two years), supported by the economic resilience and enhanced financial health of listed companies. However, Mr. Tran Duc Anh said P/E would drop to 12x in the event of the US economic recession, considering its severity and impacts on the Vietnamese economy. With the probability of the two scenarios being 65/35 (Bloomberg consensus), the end-2022 forward P/E of 14.3x is reasonable.

Mr. Tran Duc Anh said the dominant factor affecting local and global stock markets in the second half of 2022 would be the risk of the US economic slowdown under the impact of inflation, rate hike, and the resistance of the US economy against aggressive rate hikes. In the base case scenario, given the low chance of US economic recession in 2H22, Vietnam's stock market will tend to rebound on positive business performance of listed enterprises thanks to bettering economic fundamentals like high GDP growth, consumption recovery, export growth, FDI attraction, etc. However, the stock market may experience a steady upswing with alternating ups and downs as market sentiment may sour on rising macro risks.

Other factors that may negatively influence the stock market include domestic inflation (especially in 3Q22 and 4Q22), economic growth, potential risks from the corporate bond market, the SBV’s monetary policy, the COVID-19 pandemic in China, the war in Ukraine, oil price movements…