VinaCapital expert explains why stocks dropped when the economy was growing well

Mr. Michael Kokalari, Chief Economist of VinaCapital

The VN-Index recently dropped sharply despite the strong development of Vietnam's economy along with many fundamental strengths of the stock market. Those strengths include P/E ratio which is expected to reach 11.4x compared to the expectation of consensus earnings growth which is 21% for VN-Index stocks this year and a valuation discount of around 30% compared to other countries in the region.

However, there is a clear divergence in investment performance between different industries due to the difference between the fundamentals. It creates an opportunity for investors to find shelter in defensive stocks.

Three prominent areas are utilities, consumer discretionary and information technology. Share prices in these sectors are still increasing so far, supported by good results achieved in the first quarter of 2022 and by other fundamentals.

More specifically, utility profits and share prices supported by power generation growth have doubled this year, while consumer discretionary stocks are benefiting from an ambitious expansion plan of some key players in the industry.

Meanwhile, the profit and share price of the information technology industry is being driven by the outsourcing revenue of FPT, a major player in the industry, increasing by about 30%, along with an increase of nearly 60% in the number of new outsourcing contracts in the first quarter of 2022.

Besides the above three areas, Mr. Michael Kokalari also noted that the profits of materials companies increased by nearly 60% over the same period last year, driven by an 8-fold increase in profits of fertilizer companies. Profits of consumer staples companies increased by 45%. Profits of financial sector companies increased by nearly 30% year-on-year in the first quarter of 2022. Mr. Michael Kokalari expected that profit growth would reach 36% in fiscal 2022. The main reason is that credit growth of the whole industry reached 14% and the increase in net profit margin at domestic commercial banks.

In addition to the impact of the global stock market's decline, the fact that investors are forced to sell stocks related to margin lending has been putting heavy pressure on the Vietnamese stock market in the past two weeks.

The number of retail investors participating in the stock market in Vietnam has increased by almost 70% in the past 12 months and most of the new entrants to the market tend to prefer to open a margin trading account with the hope of making a quick profit on the stock market.

“The decline in the US and global stock markets have triggered margin calls and many of these new investors are abandoning their long positions. As a result, we estimated that the outstanding margin balance at brokerages has fallen by about 25% from its peak several weeks ago,” Michael Kokalari said.

However, besides being forced to sell stocks, there is another factor related to the sell-off of securities. Some companies have raised capital to develop real estate or other projects but then used the capital for other things, even investing in the stock market. Currently, the Government is preventing this misuse of capital and this is another reason why investors are forced to sell shares.

Mr. Michael Kokalari assessed that the decline of the Vietnamese stock market was consistent with what happened in global markets, despite the increasing selling pressure due to the presence of many small investors who are facing margin calls for the first time, as well as tight government controls on companies that borrow money to invest in stocks. However, none of these reasons is likely to have a major impact on Vietnam's economic growth or on the total profits of listed companies.

In the first quarter of 2022, corporate profits increased by about 30% compared to the same period last year and Kokalari expected that the profits of all companies listed on the Hanoi and Ho Chi Minh stock exchanges to increase close to 30% this year while the returns on stocks held by VinaCapital's top internal funds VESAF and VEOF are likely to grow around 40% this year and are trading at a valuation discount of 22 % and 5% compared to the VN-Index.

“It is also important to note that the value of the dong is almost flat year-on-year even though the USD/DXY index is up 15% year-on-year. We believe that the resilience of the dong despite the strong appreciation of the USD is an accurate indicator of the fundamental strength of the Vietnamese economy, thereby helping to support profit growth as well as market growth,” Mr. Michael Kokalari said.