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 loses 2.7% in January on coronavirus to close at 937

The VN Index rose steadily throughout the first half of January, gaining over 3% before the weeklong Lunar New Year (Tet) holiday.  However, when the market reopened after the holiday, the VNI tumbled by 5.5% in the final two remaining trading days of the month on fears surrounding the coronavirus outbreak.  The VNI ended the month down 2.7% ($TR) at 937 points.

Trading volume slips while foreigners return as net buyers

Trading volume declined as retail investors exited the market before the holiday, with average daily traded value falling to $167m (-16% mom).  Foreigners, however, were net buyers for the first time after five consecutive months of net selling, injecting $84m into the HOSE.  The bulk of that buying came from a $44m block deal for 21% of PV Gas Distribution (PGD) by a Japanese strategic investor, followed by a $25m inflow into Mobile World (MWG) as its foreign room was lifted after an ESOP issuance.  Meanwhile, stocks seeing the most outflows included Vietcombank (VCB, -$6m), Vingroup (VIC, -$5m), and PV Power (POW, -$4m).

Bank stocks continue to lead

Bank stocks, most notably Vietinbank (CTG) and VP Bank (VPB), outperformed the market. CTG jumped 16.8% after reporting 80% growth in PBT for 2019, while VPB gained 12.3% on news of its 26% growth in 2019 core PBT.  Property stocks, most notably Dat Xanh Group (DXG -20.3%) and DIG (-12.3%), were hit hard.  Vinhomes (VHM) was the only bright spot in the sector, gaining 3.0% as it reported higher-than-expected 2019 profit, up 49% yoy.  Other major laggards included Masan Group (MSN, -11.3%), FPT(-11.0%) and PVGAS (GAS, -7.7%).  While MSN continued its slide on doubts about the economics of its deal with Vinmart, FPT reported weaker-than-expected 4Q19 results, with earnings down 4% yoy due to losses at subsidiaries.  And GAS led the energy sector lower as the oil price plunged after the virus outbreak.

Coronavirus expected to hit 2020F earnings by around 3%

While uncertainty surrounding the virus remains high, we estimate that the outbreak will negatively impact our Top 60 companies’ 2020F earnings by around 3%.  The hardest hit sectors are expected to be aviation and tourism, followed by energy and materials.  Earnings will be hit in 1Q20 but are expected to recover later in the year, and the market will remain volatile until there is more clarity on the virus.  According to the model by Zhong Nanshan, a leading Chinese epidemiologist who discovered SARS and helped control it, the number of new cases should come down rapidly by mid-Feb.  If history is any guide, global markets typically deliver solid gains after the containment of disease outbreaks.  As such, the recent selloff offers a good entry point for long-term investors, as Vietnam remains cheap vs peers on superior growth.

Chinese coronavirus creates economic uncertainties

The recent outbreak of the coronavirus in China has created uncertainties for Vietnam’s economy that are difficult to estimate with any precision just now.  Given Vietnam’s geographical proximity to China, and with China being its biggest trade partner, Vietnam’s 1Q20 macroeconomic numbers could be significantly affected.  However, we expect the rebound from the impact will be strong in the following quarters on accumulated demand.

Vietnam closes border with China

Since the first reported case from Wuhan, China, on 31 Dec 2019, Vietnam’s Government immediately took measures to control the transmission of the virus.  As of 30 Jan 2020, the Civil Aviation Administration of Vietnam imposed travel restrictions between Vietnam and all Chinese cities exposed to the virus.  Several border crossings between Vietnam and China in the northern provinces have been closed to trade until 9 Feb.  As a result of these measures, companies involved in aviation, tourism, manufacturing, and retail are likely to be negatively affected, especially in 1Q20, depending on how long the virus lasts.

10% of bilateral trade could be hit

In 2019, total trade between Vietnam and China was $117bn, of which exports were $41bn (23% of Vietnam’s total exports) and imports were $76bn (roughly 30% of the total).  Of that, agriculture accounts for 10% of the bilateral trade and is expected to be the most vulnerable segment due to the border closure.  If the virus lasts for 3-4 months, it would likely impact supply chains and the flow of materials, which will result in a disruption of Vietnamese manufacturing of electrical machinery equipment and accessories, footwear, textiles and such.

Coronavirus to impact GDP by -0.5% to -0.7%

While it is too early to accurately estimate its impact, the Ministry of Planning and Investment is projecting that GDP growth could contract by ~0.5% if the virus can be contained within 1Q20 and by ~0.7% if it is not contained until the end of 2Q20.  However, the recent Government cabinet meeting did not indicate that it would revise down its growth target of 6.8% for 2020.  An economic stimulus package to deal with the virus was discussed, but it remains to be seen exactly what the Government will do.

Virus impact mitigated by Lunar New Year holiday

Fortunately, the outbreak happened during the Lunar New Year holiday, which is typically a low-activity season in Vietnam.  As such, the impact on the economy will be less severe than if it had happened at any other time of the year.  We will revise our macroeconomic forecasts as soon as the situation becomes clearer.