Vietnam

Vietnam continues to be one of Asia’s most compelling investment stories. With 94 million people – 41% of whom are aged under 25 – this young and dynamic country is the world’s 15th most populous.

Vietnam benefits from excellent demographics, an entrepreneurial culture, abundant resources, a largely coastal population living on its long seaboard, and a strategic location bordering China in the north.

Vietnam’s lower wages and operating costs are allowing it to capture manufacturing business from China. At the same time, newly signed trade agreements and internal reforms are making it ever easier for foreign companies to do business here.

Consistently growing by close to 7% annually, Vietnam is rapidly transforming into an export powerhouse with a thriving domestic consumer market to match. As a place to invest, the country continues to offer extraordinary potential.

VNI hits 18-month low in February, shedding 5.8% to close at 882 points

The global spread of the COVID-19 virus prompted panic stock selling around the world, and Vietnam’s market was not spared.  The VN Index ended the month down 5.8% ($TR) at 882 after hitting a 19-month intraday low of 872 at one point – amid escalating numbers of infections outside of China as the virus spread more rapidly than expected.

Liquidity thin as foreign outflows accelerate

Liquidity remained thin as average daily traded value fell slightly to $165m (-1% mom).  Foreign investors net sold $121m on the HOSE.  All emerging Asian markets suffered heavy foreign selling during the month, with the sole exception of India.  The selloff was exacerbated by several mid-cap funds in the region divesting from Vietnam in order to shift into their focus to other markets such as China.  Vietnam’s stock market has lost 11.0% since the beginning of the virus outbreak.  This is in line with regional peers such as Thailand, which has lost 11.4%, and Indonesia, which is down 10.8%.

2020 earnings slashed due to virus

Given recent developments, we have cut the 2020 earnings forecasts for our Top 60 companies, though uncertainties linger as the virus and its ultimate impact remain a big question.  Our base case assumption is that economic activity will return to normal in late 2Q20.  Among the hardest hit sectors will be aviation.  Airports Corporation of Vietnam (ACV) saw its share price shed 21% as the company will almost certainly experience a significant profit decline this year because of travel bans.  And with the sharp recent plunge in the oil price, energy stocks also suffered:  PV Gas (GAS) saw its share price fall 12.4%.  Meanwhile the F&B sector, represented by Sabeco (SAB), was also negatively impacted by the virus, on top of the recent decree that caused a decline in the consumption of beer.  On these factors, SAB lost 23.6% for the month.

Diamond ETF approval to improve market access

On a positive note, the SSC approved the Diamond ETF, which tracks Vietnam’s largest FOL stocks.  After years of issues with FOLs, Vietnam seems to be taking a different approach by offering access to these stocks through ETFs, open-ended funds, covered warrants, etc.  This will help attract foreign investment into Vietnam and narrow the foreign premium on the stocks.

No change in long-term outlook

While short-term fundamentals have been impacted by the virus, Vietnam’s long-term growth story remains intact, especially given the Government’s strong and effective measures in containing the outbreak.  Nobody can call the market bottom, but things will eventually get better.  As such, the recent market drop offers investors an attractive entry point for future gains.

February economic data downbeat on COVID-19 spread

With the COVID-19 outbreak intensifying in February, Vietnam’s economic data was predictably downbeat.  The PMI hit a multi-year low, retail sentiment was weak, FDI was down, and Government bond yields continued to hit new lows.  On the positive side, the CPI cooled slightly from last month.

PMI below 50 while retail sales hit multi-year low

The PMI fell to 49 in February.  As Vietnam relies more on China for its supply chain, its PMI was slightly lower than that of regional peers.  New orders plunged for the first time since Nov 2015 while output fell at the fastest pace in the last six and a half years.  The virus outbreak will likely continue to hamper activity in the near-term, and we expect the PMI to hover below the 50-point  threshold for the next several months.  Regarding consumer sentiment, total retail sales for the first two months of the year increased by 8.3%, the lowest growth rate in six years.  Compared with January, retail spending declined 7.9% mom from the high base of the Tet holiday in January.

Temporary negative FDI impact

2M pledged FDI was ca $6.47bn, down 23.6% yoy.  Of this, a single LNG megaproject contributed roughly $4bn.  Disbursed FDI fell 5% to $2.45bn.  While the virus negatively affected FDI, it will likely boost it for the next 3-5 years as diversification away from China accelerates.

VGB yields continue lower on global rate cutting

The 10-year VGB is yielding a historically low 2.3%.  However, the bond market could continue rallying in the short term, as (1) banks have no other options than to buy VGBs to meet Basel II, (2) there is high reinvestment pressure coming from the $2bn maturing in 1Q20, and (3) supply from State Treasury is low amid low disbursement of public investment.  Medium to long term, the rate should gradually increase as the Government will likely use fiscal stimulus to boost the economy.  As such, an increase in VGB issuance should offset the current demand imbalance.

Inflation moderates from January and should continue easing

February headline inflation came in at 5.4%, led by food and foodstuffs, housing, and education.  Although still high, this was expected, as the pork price is still much higher yoy.  This is a decline from the 6.4% in January, and the trend is expected to continue lower in the coming months.  Core inflation also fell from 3.25% yoy in January to 2.94% yoy in February.  Given weakening demand, the collapse of the global oil price, and most importantly, Vietnam’s ability to self-supply food products, there will be no impact from a supply shock.  As such, inflation should not reignite.  Furthermore, the Government is determined to keep inflation low and can control key components by delaying raising healthcare, education and electricity prices.