The Viet Dragon Securities Company (VDSC) expects growth in the VN-Index to moderate in 2020 and be closely related to fundamentals rather than price bubbles, and predicts it will move within a range of 950 to 1120, according to its latest “Investment Strategy Report: Silver Chances Arise in Difficult Times” released on December 30.

Though the VN-Index had increased 8.3 per cent this year as at December 13, few investors did as well. The high earnings growth of many large stocks and sectors in 2017 and 2018 ended in 2019, tamping down local investors’ excitement. Moreover, the uncertainty from trade wars along with slow recoveries in developed economies, including the US, affected foreign capital flows into emerging markets like Vietnam.

“The expectations, challenges, and potential risks in Vietnam’s stock market in 2020 are no different from those in 2019, namely State divestment and IPOs and market reclassification,” said VDSC analyst Mr. Hoang Nguyen. “We assume there will not be any change in those. We also think the greatest risk to the market comes mainly from global political and trade issues rather than from Vietnam itself. But the market is familiar with unfulfilled expectations and external risks. So market sentiment will not be overly affected.”

The biggest support will come from the consistency of the government in implementing policies in order to stabilize macroeconomic factors and encourage domestic enterprises to develop. This will benefit Vietnam’s economy in general and domestic enterprises in particular in the long term. In 2020, net income and earnings-per-share (EPS) growth at listed companies is forecast to recover to double digits after being flat in 2019. In a context of capital flows declining compared the figures from late 2016 to early 2018, investment decisions need more filtering.

VDSC expects foreigners to turns to net buyers through matching-order transactions in 2020 because of 1) Vietnam’s ETFs can continue to draw money from Thailand and South Korea, 2) Vietnam’s weights in the MSCI Frontier Market 100 Index could increase to 30 per cent when Kuwait shifts to the MSCI Emerging Market Index, 3) progress in US and China trade negotiations, and 4) new ETFs can launch and benefit from new foreign ownership limit. Furthermore, if divestment and State IPO activities pick up in 2020, these will help draw foreign capital, though not to the extent seen in late 2017.

Main ETF fund flows are from E1VFVN30 and VNM US Equity ETF. E1VFVN30 ETF is likely to draw more money from its main investors, South Korea and Thailand, as the central banks in both cut interest rates in 2019 and the VN-Index, up 8.3 per cent year-on-year, outperformed the KOSPI Index (6.3 per cent) and the SET Index (0.6 per cent).

Meanwhile, VDSC does not expect much inflow from VNM US Equity ETF, as the S&P 500 (up 26 per cent year-on-year) increased significantly in 2019, denting the attractiveness of other stock markets. Instead of investing in ETFs, it believes investors from the EU and the US will likely invest based on a bottom-up approach in Vietnam’s stock market.

Kuwait will move up to the MSCI Emerging Market Index in May, so Vietnam’s stock market’s weight in the MSCI Frontier Market 100 Index will increase to 30 per cent from the current 12.3 per cent, according to MSCI Kuwait Consultation. As a result, the MSCI Frontier 100 ETF can put $90 million more into Vietnam’s stock market. Its weight in the MSCI Frontier Market Index, meanwhile, will increase to 25 per cent from the current 17 per cent. Even though no ETFs track this Index, some active frontier funds that benchmark the Index may selectively put more money in large and liquid Vietnamese stocks.

In addition, although the US and China’s structural conflict has not been addressed, a Phase I deal has reduced some risks.

VDSC expects the foreign capital flows to turn around in 2020 but the market may face difficulties in drawing money from local investors, due to the high performance of corporate bonds, gold (up 14 per cent year-to-date), and real estate in 2019. Additionally, the State Bank of Vietnam (SBV) lowering the cap on short-term deposit rates should help the market draw money from bank depositors, but rates for terms of more than one year remain high. The main support for the market will be high earnings growth and expectations over State divestment and IPOs.

In the context of capital flows not being as abundant as previously, investment also needs to be carefully scrutinized, aimed at businesses with organic growth from their core business. The increase of the VN-Index in 2020 will be moderate and closely related to fundamentals rather than price inflation.

“2020 will continue to favor bottom-up investment strategies,” VDSC wrote. “Investors could consider companies benefiting from domestic consumption and infrastructure investments. Some high dividend yield stocks would be suitable for the risk-averse.”

Its preferred stocks in 2020 include MWG, SMB, VPB, NLG, QNS, PVD, HPG, PVS, IMP, DRC, BID, and BMP.