Which Industries to Achieve Strongest Growth in 2021?

Vietnam's next 5-year plan may have two phases: 2021-2022 (recovery phase) and 2023-2025 (acceleration phase). Therefore, in 2021, the Government will continue to loosen the monetary policy and extend the expansionary fiscal policy. The budget deficit may remain high, even in absolute values as currently priced GDP is revised up.

Individual investors continue to be key drivers of the stock market

Although Vietnam was not immune to the Covid-19 pandemic, its damage was reportedly lower than that of other countries in the region. In the base scenario developed by SSI Securities Corporation, as other potential Covid-19 pandemic outbreaks still loom large, international commercial flights will gradually resume only from the second quarter of 2021 and international tourist arrivals will increase gradually.

Unlike other economies, Vietnam's economy was not in recession in 2020. However, the unemployment rate in fact increased, savings rate was higher and consumer confidence weakened in 2020. Main economic indicators remained positive in 2021. According to SSI, GDP growth is forecast at 6.5% in 2021. (higher than the Government's plan of 6%). The growth will start to accelerate (to over 7%) from the second quarter of 2021 and keep that momentum till 2022.

Notably, on the stock market, the VN-Index outperformed Morgan Stanley Capital International's Frontier Markets Index (MSCI FM) over the past 5 years. Since the beginning of the year, the VN-Index has grown 12.7% higher than the MSCI FM Index. Like other markets, the mid-cap stock basket has increased 12% more than the VN30-Index component stocks in 2020, ending three-year underperformance to the VN30 basket.

According to SSI's latest analysis, MSCI announced that the share of Vietnam in the MSCI Frontier Markets 100 Index basket will increase from 12.5% to 28.76% in November 2021 after five phases. Currently, Vietnam accounted for 14.2% of this index basket. On the one hand, this may be a positive factor to attract foreign funds into the Vietnamese market in 2021. But it should be noted that MSCI is also consulting on the Argentina market reclassification (from an emerging market) a frontier market or a standalone market. Nevertheless, it must wait until June 2021 to see if the country will return to the frontier market or not. If this is the case, Argentina may take up a large share of the Vietnamese market in the index basket.

In fact, individual investors continued to be the main driving force for the stock market. The number of newly opened accounts was the highest ever in November. Foreign investors used to account for 15-18% of the total market trading value in previous years. But, as of November 2020, the share of foreign investors decreased to only 12% and only around 7.7% in recent weeks. Foreign investors sold net more than US$700 million in the first 11 months of 2020 and only ETFs had a modest inflow of US$95 million in 11 months.

If foreign capital flows come back in 2021, especially with a higher ratio for Vietnam in the MSCI FM Index, this will be strong support for the stock market next year as individual investors often follow foreign investors’ actions.

Which industry is the most promising in 2021?

According to SSI Research, earnings growth of listed companies was estimated at 23% in 2021 after declining 17% this year. The P/E ratio was 16.03 in 2021. According to historical market data, SSI picked the P/E ratio of the last three years because Vietnam's stock market considerably expanded in size and foreign investors made easier investment amid the strong economic growth cycle. The median P/E ratio in the 2018-2020 period was 16.4, with the highest at 21.6 seen on March 22, 2018.

With a market P/E ratio of 16.03 times, according to SSI, the current valuations of most industries already returned to their levels before the Covid-19 outbreak and their earnings will even rebound strongly in 2021. However, the year 2020-2021 may be different, especially given the abundant liquidity and the growing role of individual investors, especially veteran investors. In addition, Vietnam's market valuations are still relatively lower than those of other countries in the region. In the best scenario, capital inflows to the stock market will be the driving force to push the market P/E ratio to a record high as achieved in the past three years in 2021. In the base scenario, SSI used a P/E ratio of 18 for the VN-Index in 2021 (equivalent to a bullish outlook of 12.3%). Particularly, banking and real estate sectors are the two largest sectors in the VN-Index, accounting for 27% and 26% of the basket, respectively. But, it is noted that both sectors are believed to benefit from the pandemic as lending rates declined and liquidity rose, helping raise the Net Interest Margin (NIM) of listed banks while the risk of bad debts in the second and third short Covid-19 outbreaks was very low. On the other hand, real estate prices continued to look up amid limited supply in Ho Chi Minh City.

Hence, SSI predicted that energy, non-essential consumer goods and real estate sectors will achieve the strongest growth in 2021.

By Anh Mai, Vietnam Business Forum