Seeking Grounds for Overheating Stock Growth in 2020

From the 650-point bottom when the Covid-19 pandemic broke out in Vietnam at the end of March 2020, the VN-Index increased sharply and surpassed 1,000 points in the last month of 2020, bringing life-changing opportunities for many investors, especially new ones.

The question is why stocks are advancing while the economy and business performance are declining due to the pandemic.

To be a losing stock investor in 2020 is almost out of the question!

According to MB Securities Company (MBS), foreign investors have net sold VND33,173 billion (US$1.4 billion) on the stock exchange since the beginning of the year. The Covid-19 pandemic has produced strong pressure on foreign outflows in many markets, including emerging and frontier markets. Vietnam's stock market also witnessed net outflows through order-matching trading, the biggest outflow since 2018.

Previously, foreign investors were an important trend setter on the local stock market, even many domestic investors were accustomed to seeing foreign movements to predict the market trend and take action. In 2020, Covid-19 overturned what was old. The stock market is the game of domestic investors in 2020 and many stocks have risen sharply, even adding 100% of the value from their yearly lows, driven by ample cash inflows from domestic investors.

Resources, chemical, construction, building materials and industrial real estate were best performers on the local bourse. These industries benefit, or expected to benefit, from public investment policies, from the shift in supply chains, and from low input prices.

According to stock specialist Dao Phuc Tuong, it is very difficult to be a loser on the Vietnamese stock market in 2020. At the beginning of the year, when the pandemic started to wreck the economy, the caution embraced both professional and individual investors. However, Tuong also had to change his careful stance. The lesson learned after the stock market performance in 2020 was shared by him: "We should not argue with the market."

Cash flows are catalyst to the stock rally

Corporate performance and liquid cash are important factors to stock market prices. In 2020, according to FinnPro's forecasts, the after-tax profit of 742 listed non-financial companies will contract by 21.5%. In the fourth quarter of 2020, the profit after tax is estimated to shrink 6.4%, unchanged from the previous quarter. The decline in the two last quarters was weaker than their profit forecast for 2020, but the overall business picture of non-financial businesses is still recession, and no bright prospect is on the horizon.

In fact, there are no changes in fundamental factors and business performances of listed companies, he noted. Except for financial sectors, other sectors underperformed last year while many stocks have reached their highs in 2019. “The stock price goes faster than fundamental indicators because of cash inflows," he added. “You should not insist that a profit-making company has a stock price growth,” he advised. The portfolio structure should be flexible to market signals because stock prices and corporate fundamentals often go in the same direction but they sometimes do not. The year 2020 is a testament to this.

MBS’s statistics shared by Mr. Tran Hoang Son, Research Director, told that the global stock market has overcome adverse effects of the Covid-19 pandemic, with the MSCI All - Country World Index rebounding to a higher level than before the pandemic outbreak.

In addition to lowering interest rates, central banks pumped trillions of US dollars into the financial system and launched many loan and bond purchase programs (both government and corporate). According to the law of supply and demand, money is always in balance with goods. When liquid money is pumped out too much, in excess and interest rates drop to a record low, investment channel prices will increase as a result. “In our opinion, the driving force for the stock price growth in 2020 is the cash flow," said Hoang Cong Tuan, chief economist of MBS.

In 2019, the capital flow through the ETF channel accounted for more than two-thirds of foreign net buying (about US$250 million). In nearly the first half of 2020, foreigners withdrew more than US$64.64 million, focusing on the ETF VanEck, VFMVN30 and FTSE Vietnam. After the Covid-19 pandemic outbreak, cash flows continued to be channeled into newly established domestic ETFs such as VFMVN Diamond (+US$64 million), Finlead (+US$22.50 million). This is one positive signal. Since the beginning of the year, ETFs have returned to buy net US$60.8 million. In the long term, the cash flow trend in Vietnam's stock market is still attractive and Vietnam attracted US$513.58 million net in the last three years.

In 2021, will the stock market extend the rally?

As many as 49% of respondents in an MBS survey on the VN-Index outlook believed that the VN-Index will end the year 2021 at 1,100 - 1,200 points. This development showed that many investors are placing their trust in the stock market, which is expected to grow higher.

The investor optimism is supported by many factors. It is noteworthy that the impact of the Covid-19 pandemic on the global stock market is decreasing. Many countries are vaccinating against the pandemic, fostering expectations that the pandemic will be pushed back. The focus of the global stock market is still the United States market. Following the global financial crisis in 2008, the US stock market has recovered strongly in the wake of strong economic stimulus packages. In 2020, hit by the Covid-19 pandemic, the Fed continued to maintain its easing program, unprecedented in history.

MBS gave two optimistic market scenarios in 2021. In the first scenario, EPS growth was forecasted to rise 16.7% from 2020. The VN-Index will move in the range of 965 - 1,165 points (equivalent to the weighted P/E ratio of 14.94). In a more optimistic scenario, EPS growth is forecast at 19.4%. The index will go in the range of 995-1,230 points.

Beside corporate performance and liquid cash flows as in the global financial market, Vietnam's stock market has its own story: Market upgrade prospects. In fact, the Vietnamese stock market has achieved many criteria for the upgrade, the remaining barrier is just foreign ownership and some factors in market operations. The enforcement of the new Law on Securities in early 2021 and the operation of the central clearing partner settlement system, implemented by the Vietnam Securities Depository (VSD) from 2021, will allow intraday trading clearing payment (T+0) and lower the margin ratio from 100% to 10-20%, helping improve market operations and relieve problems for foreign investors.

Despite being optimistic about the market prospect in 2021, experts also sent some alarming signals. US stocks are among the dearest for the past 100 years while the Vietnamese market valuation is slowly becoming expensive. The forward P/E ratio of 742 listed non-financial companies is 19.9, higher than the trailing ratio of 17.7, showing that investors must be more prudent to have another winning year of 2021.

Source: Vietnam Business Forum