VN Index may fall
The 2023 strategic report has just been published by Maybank Investment Bank, in which the expected picture of the stock market this year looks bleak and unpredictable as indicated in various shades of dark colors. In it there are two key scenarios from bad to extremely bad, due to the lowest valuation in the last ten years. Because of this the VN Index may fluctuate and accumulate in the first half of the year, before following a clear recovery trend in the last months of 2023.
The reason for Maybank Investment Bank to propose a report illustrated with many dark colors comes from many factors. The first is the extreme pressure of the exchange rate. In the third quarter of 2022, this pushed the economy of Vietnam into a moderate cyclical recession, especially when the State Bank of Vietnam raised the operating interest rate by 200 points in just one month. However, all throughout 2023, inflation will remain the State Bank of Vietnam’s top concern, with a looming recession and interest rates also expected to continue to rise all through the year.
In this scenario, the VN Index is forecast to drop to 850 points or even 950 points, due to the dual effect of falling Earning Per Share (EPS) and reduced liquidity. In the second half of 2023 it may recover to 1,150 points or 1,400 points with more monetary easing to save the economy.
However, we still have to be prepared for a worst-case scenario, stemming from high level of individual investor participation in the corporate bonds market. This factor still remains unhealthy and needs to be reduced. On the other hand, the current bank credit space is not enough to completely replace VND 200,000 bln of corporate bonds of real estate enterprises that are set to mature between 2023 and 2024. As a result, the reduction in leverage is likely to accelerate this year, and if there are more bankruptcies then the confidence of home buyers will be rather shaken, pushing the real estate market down even further. In this dire scenario the VN Index may drop to as low as 750 points.
Factors for optimism
The complications being created in the corporate bonds market and the possibility of a recession in the real estate market is clouding prospects of economic growth along with a sluggish stock market.
However, according to Maybank Investment Bank, there are still positive factors that could change the game sometime this year. The first factor is based on the Government GDP growth target of 6.5% and public investment that will be the main driver. Government inflation threshold has also been raised to an average of 4.5% in 2023 from 4% in the last five years, which means that the Government can accept inflation of 4.5% and is willing to accept the risk to move to a dovish state by end of second quarter.
The second factor is based on China reopening again but it will take about six months for the Chinese people to recover from Covid and return to work. China is Vietnam's largest trading partner with bilateral trade contributing 25% of Vietnam's total international trade as of 2021. In particular, visitors from China account for one-third of the total number of visitors to Vietnam and they are also big spenders. Vietnam Airlines, the country's national airline, has resumed some commercial flights to China since December 2022. Therefore, the reopening of China will boost Vietnam's trade and tourism as well as increase its foreign exchange coffer.
The Viet Dragon Securities Company (VDSC) forecasts that the VN Index may approach the threshold of 1,200 points to 1,270 points in the last months of the year. The VN Index may even reach 1,300 points to 1,350 points on the basis of profits of listed companies increasing by 14% and a P/E valuation of 12x to 12.5x. In a more cautious scenario, the FED can maintain a high interest rate at 5% to 5.25% until the end of 2023 and inflation still cannot cool down as expected. In this scenario, VDSC predicts that the VN Index will fluctuate at 930 points to 1,060 points.
Another important factor is an attractive valuation that has not been seen in a decade with the VN Index trading at a P/E of 10x, lower than the 3-year average. This is rare, except when it occurred during the Covid-19 outbreak in March 2020. If compared with regional indexes, VN Index is at an attractive level, lower than most indexes in the region. According to Maybank Investment Bank, for a country that could deliver 6% to 7% GDP growth, such valuation presents a huge opportunity.
The third factor is the growing expectation of incoming foreign capital. According to international analyst forecasts, Vietnam's stock market is likely to be upgraded to a secondary emerging status by the FTSE this year, thanks to the application of a Central Clearing Counterparty (CCP) system. The establishment of the Securities Depository and Clearing Corporation (VSDC) in December 2022 was one of the important steps for the new system to come into operation in June as expected. It should be repeated under the current system, and the buyer's risk will be covered by the seller.
That is to say that the buyer must have 100% cash before making a transaction. In addition, the T+1.5 payment reduces the flexibility of buyers to optimize their cash flow management.