Low inflation a catalyst for Vietnam bourses amid worldwide CPI surges

Many analysts believe inflation will not be a major issue for the Vietnamese stock market this year, while inflationary pressure has surged worldwide.

A low inflation rate is even expected to bring foreign investment back to the country’s bourses, they said.

Vndirect, Vietnam’s leading securities company, maintains its forecast for the country’s CPI in 2022 at 3.45% in a newly-released report. Despite the possibility of rising inflation, the State Bank of Vietnam will maintain a flexible monetary policy until at least the end of Q2 to support the economic recovery, it added.

The Russia-Ukraine crisis, VNDirect noted, has little impact on the investment environment and FDI inflows into Vietnam as direct investment from Russia and Ukraine accounts for only 0.4% of the country’s total FDI. However, due to the conflict, Vietnam might experience a retracement of foreign indirect investment (FII) in the short term as global financial investors sell riskier assets to shift to safer assets such as gold or the US dollar.

"Moreover, predictions of hikes in Fed interest rates might cause FII inflows to withdraw from emerging and frontier markets, including Vietnam, and return to the US in the medium run."

But Vietnam’s inflation rate is significantly low compared to other countries’ worldwide, an advantage. The US’s CPI by the end of February was up 7.9% year-on-year, the highest increase in 40 years. In an effort to curb inflation, Fed intends to raise interest rates six times in 2022, from 0-0.25% to 1.5-1.75%. The IMF forecasts global economic growth in 2022 at 4.4% and inflation around 3.5%.

Another Vietnamese brokerage house, MBS Securities, stated: “Without the Eastern Europe conflict, Vietnam’s GDP growth was expected to be 6.5% and inflation at 3.5%. If the conflict causes Brent to hover around $120 per barrel, Vietnam’s GDP will fall 0.15% to 6.35% and inflation will jump another 0.9% to 4.4%.”

In terms of the VND/USD exchange rate, because the inflation in the US is currently significantly higher than Vietnam's, and the US’s interest rate level in 2022 is significantly lower than Vietnam’s, even if the Fed raises its interest rate six times, the VND is not under much pressure to devalue this year in comparison to the USD, the company noted.

Notably, while the global stock market has been rattled, with major markets falling 10-18% in recent months, the stock markets in Southeast Asia, Latin America, and Africa have been less influenced by variables such as inflation, interest rates, and geopolitical concerns, MBS Securities added.

“Inflation in most Asian countries remains much lower than in Western economies. Shocks in the supply chain, including port congestion and rising shipping prices, continue to plague most developed economies in the West, but have had little impact on Asia.”

Some Southeast Asian stock markets remain ahead of the world’s major markets, as foreign investors perceive them as a safe haven from the storm in developed markets.

Banking expert Le Xuan Nghia said foreign investors have net sold over $3 billion on the Vietnamese stock market since last year, yet his research on the foreign exchange market shows that the money remains here, on their accounts in Vietnam.

“That’s why we expect foreign investors to return and contribute to the stability of the market. This capital flow will not only offset fresh investors’ withdrawals, but can also be a solid pillar for the market in the period of 2022-2023.”

Nghia highlighted several essential elements that will attract foreign investment in 2022, such as an inflation rate of less than 4% while many countries might see it around 10%, an economic expansion of around 5.5%, and positive FDI growth. Specifically, the currency rate has remained stable over the last three years, and the country's foreign exchange reserves have reached an all-time high of $109.9 billion, successfully supporting exports and investment.

HSBC in February raised Vietnam’s 2022 inflation forecast to 3% but saw it not a big concern. When fuel prices were more volatile in the face of Russia-Ukraine tensions in March, the bank continued to warn about inflation risks but did not revise up its forecast. The World Bank, in this month’s update, noted that inflation is being contained despite rising fuel prices.

Dragon Capital, a top fund management company in Vietnam, estimated the country’s inflation would be in the range of 3.58-3.8%, which is still lower than the government’s target of 4%. And only in case the Russia-Ukraine conflict escalates plus no Iran nuclear deal, and oil price climbs to $105 a barrel, Vietnam’s inflation would be in the worst scenario, at 4.18%, it said.

VinaCapital, a top investment fund in Vietnam, recently revised down its Vietnam GDP forecast by 1% to 6.5%.

ADB in March anticipated Vietnam’s growth rate to converge to its pre-pandemic level of 6.5-7% in 2022 thanks to “fast vaccination progress, sustained global economic recovery, and certain key drivers of economic growth which include the economy’s digital transformation.” In the same month, IMF estimated the country’s economic expansion at 6.6%.

VNDirect said the firm maintained its GDP forecast for Q1/2022 unchanged at 5.5%, while the whole year figure remains at 7.5%.