Fed rate cuts, upgrading efforts to lure foreign investors back into Vietnam stock market: VinaCapital

The U.S. Fed’s rate cut cycle and the Vietnamese government’s fresh efforts to upgrade the local stock market status are likely to bring foreign investors back into the stock market next year, according to VinaCapital.

Foreign investors net sold VND66.17 trillion ($2.62 billion) worth of Vietnamese stocks on the Ho Chi Minh Stock Exchange in the first nine months of this year, partly because of concerns about Vietnam's “political transition” and local currency depreciation, the Vietnam-focused fund management firm said in a report last week.

“The latter has now essentially been resolved, and the Fed’s rate cuts should put downward pressure on the value of the U.S. dollar, which is typically good for emerging markets,” VinaCapital commented.

In addition, some progress has been made recently in upgrading Vietnam’s status from a frontier market to a proper emerging market by FTSE thanks in part to new government measures that align the functioning of financial markets more closely in line with international norms.

“All of these factors are likely to act as catalysts that will entice foreign investors back into the stock market next year,” said the fund manager.

Appealing Vietnamese stock market

The transition of Vietnam's GDP growth from being driven by external factors in 2024 to being driven by domestic factors in 2025 will be good for the stock market because the vast majority of Vietnam’s exports are produced by FDI companies that are not listed on the local stock market.

“For this and other reasons, we expect VN-Index EPS (earnings per share) growth to accelerate from 18% in 2024 to 23% in 2025,” VinaCapital analysts said.

The expected surge in real estate earnings in the chart above links closely with their expectation for an expected pickup in real estate development activity.

They noted that earnings quality in Vietnam is high, as evidenced by an expected 16% market-wide return on equity (ROE) next year, despite Vietnam’s net debt-to-equity (D/E) only being around 24%.

Both these two metrics compare favorably with Vietnam’s Emerging Market ASEAN peer stock markets (Thailand, Malaysia, Indonesia, the Philippines). The aggregate ROEs of those markets range from circa 10-14%, while the net D/E ratios of these stock markets range from 50-100%.

Furthermore, Vietnam’s circa 10x forward P/E valuation is about 25% cheaper than those of its regional peers and the analysts expect 17% CAGR (compound annual growth rate) earnings growth over 2023-2025 versus circa 3-13% earnings growth for the four peers.

The 10.1x P/E valuation of Vietnam’s stock market is also very low compared to its historical norm; the market has only traded at this low valuation level once in the last 10 years, during the Covid-19 pandemic.