Vietnam Stock Market :An Opportunity for a Comeback

Vietnam is not the first country that has made investors reconsider their investment opportunities. This is not only because Vietnam has been considered a borderline market, but also due to the inherent instability in the Vietnamese stock market over the last four years. However, investors are more than willing to consider the Vietnamese stock market as an integral part of their investment portfolio, especially when their investment is made before any positive effects are realised from the current economic reform.

 

When Vietnam joined the World Trade Organisation (WTO) in 2007, observers believed that Vietnam would become the next export powerhouse in Asia.

However, expectation about a “major breakthrough from fish to computer chips” has yet to materialise due to impacts from the global economic crisis and bad macroeconomic policies leading to an unstable economic cycle.

 

Numerous policies, such as fiscal and monetary tightening, subsidising petroleum, electricity and necessities etc. have led to a prolonged period of inflation. Nevertheless, the Government has realised their mistakes and began to initiate bold economic reform.

 

The reform has so far resulted in some positive changes regarding the macroeconomic condition. Credit growth and money supply as well as budget deficit have all seen major reduction. This is the first time that foreign currency reserves have doubled over the last eight months. The foreign exchange rate has remained stable for more than a year, showing that the depreciation cycle of the local currency might not happen in the near future.

 

In the period of lower GDP and high but decreasing rate of inflation, bonds are often regarded as the most efficient investment channel. When the economy recovers, however, investors tend to invest in the stock market. The difficulty lies in the judgment of when the transition happens so that appropriate adjustment in the investment portfolio can be made.

 

During the third quarter of 2011, Vietnam was entering a period of trivial GDP and profit growth but lower inflation rate.

 

The Consumer Price Index (CPI) growth rate reached its peak of 23.1 percent in August 2011 and kept decreasing since then. CPI in October 2012 was up 0.85 percent compared to the previous month and 7 percent compared to the same period last year, respectively. Since the beginning of the year, CPI has been up 6.02 percent and the first-10-month average was up 9.66 percent compared to that in 2011.

 

Real estate businesses in Vietnam are shouldering a huge amount of debt, the situation of which is not unique to Vietnam. However, the debt level in Vietnamese households is not the same as in other countries. Credit card and mortgage debt in relation with the GDP was only 12 percent for Vietnamese households in 2010, while the credit outstanding to GDP ratio was 136 percent. Vietnam began its public debt reduction program in 2011 and GDP is expected to bottom out in 2013. However, because of a low debt level in Vietnamese households, the GDP can reach its bottom earlier, either in the fourth quarter of 2012 or early 2013. These will be optimal periods that investors should put their money in the stock market. It is forecasted that the price to earnings ratio (P/E) will be 9, with the VN-Index in the 450-point range and earnings per share growth achieving 18 percent compared to -9 percent in 2011.

 

The deposit rate, though has seen major decline, is among the highest in Asia. With a lower inflation rate, Vietnam is the only country in the region, which can potentially utilise flexible monetary policies to help stabilise the economy.

 

The expectation, therefore, is that the Vietnamese Government will continue to facilitate the loosening of credit and fiscal policies. Moreover, the deposit rate will be expected to see another 400 basic-point reduction to the annual 8 percent rate, creating a favourable environment for the stock market’s recovery and stabilisation.