Foreign capital needed to maintain sustainable market

(Saigon Investment) - Despite strong net selling in 2020, and positive moves in the last two months of last year, the results show that foreign investors cannot stay out of the market for long. Pressure from domestic investors is one factor that will cause foreign capital flow to reverse in the future.
Foreign capital needed to maintain sustainable market

Net selling trend

The main trend of foreign investors is still net selling, with total net selling in 2020 valued at VND 18,780 bn, the largest net selling volume in the last four years. According to analysts, the main reason was the complicated developments cross the world and uncertainty caused by the Covid-19 pandemic and the turbulent US presidential election. These latter two events made foreign capital inflow apprehensive in frontier markets, including Vietnam. The general psychology of foreign investors is to withdraw capital to minimize risk in event of any global disruption, or switch to safer assets such as bonds or shares in developed countries such as Japan, the US or the EU.

However, the fact is that foreign investors maintained their net selling trend through matching transactions, but net bought through put-through transactions. The most prominent was the net purchase of Vinhomes JSC stocks in June 2020 with value of VND 14,170 bn. This shows that foreign investors have been more selective in their capital investment. Notably, foreign cash flow in the stock market began to show signs of reversal in the last two months of 2020. Specifically, foreign investors reduced their net selling in November after the US election results were almost out, and net buying again in December although net selling status remained in Asian countries. Particularly in December, ETFs attracted about VND 2,260 bn, equivalent to 50% of the total amount of ETF capital of VND 4,580 bn in Vietnam in 2020.

Low valuation

From a positive change in the last month of 2020, analysts expect foreign capital flow to be more positive this year. According to Rong Viet Securities (VDSC), the factors to expect in foreign capital inflow in 2021 depend if Vietnam's stock market is increased in proportion in five waves in the MSCI Frontier index basket, and if the bottleneck foreign room is removed via a draft Decree of revised Securities Law, allowing the foreign room loosen from 49% to 100%. In particular, the draft circular guiding trading on the stock market was a remarkable feature in 2021. The draft has some key points, such as T+0 trading, short selling, additional tools circuit breaker and the minimum age to open a stock account. It is appropriate that the Ministry of Finance has introduced these new points in the draft circular, in order to create openness and promote access to the stock market and further attract foreign capital flow.

In addition to the above factors, the motivation for foreign capital also comes from low valuation. The low valuations are not only compared to history, but also in other markets, which are growing strongly thanks to low interest rates. According to statistics, VN Index is trading with a P/E valuation of 16.03x, higher than the five year average of 15.9x, but still quite attractive compared to other countries in Asia with a  26.2x average. According to the SSI Securities Corporation (SSI), the P/E level is equivalent to the time prior to the Covid-19 pandemic. However, the current time is very different from 2018, when liquidity was abundant and the number of investors were more. In 2021, according to Bloomberg estimates, Vietnam is still in the group of markets with best profitability, with projection that ROE will increase to 15.7% and EPS estimated to grow two digits this year.

F0’s overshadow foreign investors

The highlight of the stock market in 2020 and the first month of 2021 is the emergence of more and more new individual investors or F0’s, as they are called. According to the ratio from the Vietnam Securities Depository (VDS), in the last month of 2020, there were 63,243 newly opened securities accounts, bringing the total number of newly opened accounts to 392,527, an increase of 108% compared to 2019. Thus, by the end of 2020, the total number of accounts on the market reached approximately 2.8 million, of which individual investors accounted for 98.3%.

According to VNDirect Securities Corporation, the factors that help the stock market attract new individual investors include lower interest rates on bank deposits, other investment channels facing difficulty, and securities being traded online that do not require a lot of investment. Individual investors also overwhelm with transactions accounting for upto 90% of total trading value of the whole market. This is a very huge number, because the US stock market has also had a significant increase in individual investors due to the Covid-19 pandemic, but it only accounts for about 25% of all investors.

The boom in number of F0 investors has overshadowed foreign investors. It has also pushed up stock price and unlike institutional investors, individual investors often bring less stable psychology when participating in the market, sometimes making careless trading decisions. Notably, the decision of individual investors is focused on short-term gain. This has a direct influence on market movement, creating strong fluctuations in case of unexpected news.

At the moment, it is very difficult to give warning on the market and if it will shake in the coming sessions for individual investors. Even when interviewed, many financial experts refuse to answer because they fear they would be proved wrong. However, when the VN Index rises too high, strong corrections are likely to happen. This will be an opportunity for foreign investors to come back when they realize that the share price has dropped to a reasonable level, and when foreign capital flow returns again, the market will then begin to develop more sustainably.

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