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Banking & Finance

Major attraction

Released at: 04:10, 04/02/2018

Major attraction

Photo: Viet Tuan

The stock market has become an increasingly important channel for mobilizing resources after a positive 2017.

by Ms. Thuy Vu / Head of PCD Research & Advisory, Ho Chi Minh City Securities Corporation (HSC)

Total market capitalization in Vietnam’s three exchanges (HoSE, HNX, and UPCoM) was $146.1 billion in 2016, equivalent to 72.11 per cent the country’s GDP. As at October 31, 2017, the number of stocks had jumped 28.5 per cent compared to December 31, 2016, to 1,453, including 327 newly-listed companies. The average daily trading value on HoSE and HNX was 48 per cent higher, at approximately $190 million, and the number of securities accounts increased 9.98 per cent to 1.88 million. 2017 also witnessed numerous large State-owned enterprises (SOEs) divesting, such as Vinamilk, Becamex, and the Song Da Corporation, and conducting IPOs, including the Thanh Le Corporation, Vincom Retail, and FPT Retail. 

Vietnam’s stock market continued to be a good investment channel in 2017, beating most other markets such as savings, bonds, gold, real estate, and currency. As at December 8, the VN-Index and the HNX-Index reached 940.16 and 113.81 points, respectively, up 41 per cent and 42 per cent during the year and ranking Vietnam among the Top 10 growing markets in the world. The business performance of listed stocks in 2017 posted solid growth, in which the net profits of the Top 70 companies on HoSE and HNX grew 20.2 per cent compared to last year. Transparency in the stock market has clearly improved, with the foreign ownership limit (FOL) being lifted by many companies (HCM, BMP, and NTP) and large-cap stock portfolios adding newly-listed companies (VPB, PLX, and VRE).

Last but not least, the derivatives market introduced on August 10 brought new investment opportunities and new hedging tools against financial risk for all market players. Four months on, average transactions in the most-recent 20 sessions stand at approximately 10,500 contracts per session.

VN-Index and HNX-index, 2017

Sources: State securities commission

Inflation and credit growth since 2013

Source: General Statistics Office, 2017

Supportive policy making

Strong macroeconomic policies from the government have been the major driver of growth in Vietnam’s stock market.

First of all, the government has committed to stabilizing the macroeconomy, with low and slightly falling interest rates, a sustainable foreign exchange rate, very low inflation, of only 2.38 per cent in the first eleven months, and a strictly-controlled gold market. This creates a favorable environment for businesses to operate. Secondly, expansionary fiscal policies and easing monetary policies are being implemented at the same time to achieve the 2017 GDP growth target of 6.7 per cent, among which the most important solution is to increase the annual credit growth target in the banking system from 18 per cent to 21 per cent.

Thirdly, the government is taking drastic action in the SOE equitization process as well as reducing State ownership. According to Decision No. 1232, 135 and 181 SOEs have to be divested from in 2017 and 2018. According to Statement No. 991, dated July 10, 2017, big names to be equitized in 2018 include MobiFone, VTC, Vicem, HUD, Genco 1, Genco 2, Saigon Jewelry Company (SJC), and the Saigon Water Supply Corporation, which will attract major interest from both domestic and foreign investors. 

Finally, the State Securities Commission (SSC) has actively taken many initiatives to develop and finalize the legal framework for the stock market, including completing a revised law on securities, finalizing the legal framework and system to put the derivatives market into operation, continuing to restructure the stock market, bolstering the management of public companies and intermediary organizations, and strengthening the inspection and supervision of violations.

There are obstacles that need to be resolved, however. For example, the free float ratio is quite limited. A limited free-floating share in some SOEs or privately-owned large-cap stocks may lead to extremely expensive stocks, such as SAB, ROS, and VIC, with a PE ratio of ~44, 100 and 180, respectively. Consequently, market indices are heavily driven by the limited free float ratio but hugely capitalized stocks can be easily distorted.

Net buy/sell in 2017, by month

Sources: State securities commission

% vn-index return and GDP, by year

Source: General Statistics Office, 2017

Foreign investors: Net buyers

All of these policies contribute a great deal to attracting foreign capital flows into Vietnam’s stock market, which in turn contributed to the unbelievable stock market rally seen in 2017. Except for September, when foreigners slightly net sold, they net bought throughout the year. Net buying by foreign investors for fiscal year 2017 was estimated at $1.1 billion compared with net selling of $354 million in 2016. This also marks the second-highest net buying by foreigners in the market’s history, just slightly less than in 2007. VNM and VRE saw the highest net buying: VNM at VND14.927 trillion ($657 million) and VRE VND5.242 trillion ($230 million). It should be mentioned that JC&C spent nearly VND9 trillion ($395 million) on purchasing all of the 3.33 per cent of VNM sold by the State Capital Investment Corporation (SCIC) at a recent auction, while foreigners spent VND5.5 trillion ($241 million) on VRE stocks on its first listing day on HSX. These surprising numbers demonstrate the attractiveness of Vietnam’s stock market in the eyes of foreigners.  

Major gains and losses in 2017

2017 has been an amazing year for Vietnam’s stock market, growing more than 40 per cent. Gains included huge profits for investors, increasing liquidity, massive foreign capital inflows, the birth of the derivatives market, increasing profit growth among listed companies, new IPOs, major corporations with huge market caps being listed, like VRE and PLX, and aggressive divestments by SOEs such as VNM, FPT, BMP, and VCG. 

Apart from these gains, however, some losses were seen. Firstly, the market is very segmented. If only stocks listed before 2017 were calculated, 257 out of 688, or 37.4 per cent, recorded losses. And if 7.2 per cent is taken as the minimum rate of return (7.2 per cent being the average deposit rate in 2017), 46.2 per cent of stocks fell short.

Secondly, valuations (based on PE and PB) on Vietnam’s stock market are not cheap compared with other countries in the Asia-Pacific region, especially stocks with very high PEs such as ROS, VIC, and SAB. A stock market bubble is not yet a major concern but all must keep an eye on valuations.

Global business cycle, as at October 2017

Source: Fidelity Investment November, 2017

2018 outlook

Vietnam’s macroeconomy will continue its recovery in 2018, which has lasted since 2013. Interest rates remain at their lowest levels for many years, with high credit growth creating a favorable environment for enterprises. Inflation has been well controlled, at below 5 per cent. The USD exchange rate has also been very stable. The State budget deficit decreased sharply during the year, which also provided some encouraging signals, given the deficit was a main concern when 2017 began.

The net profit of the Top 70 firms is expected to grow 15.9 per cent in 2018, with the banking, real estate, steel, securities, energy, and technology sectors to be stand-out performers.
There are still certain risks that need to be considered. Political risks around the world are becoming more complex, while China’s lower GDP growth due to its changing economic development orientation could lead to unexpected surprises for the market. And the US Fed may keep raising interest rates. 

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