The valuation of Vietnam’s benchmark VN-Index based on both price-to-earnings (P/E) and price-to-book (P/B) ratios has fallen to a level that was as cheap as it had been only twice in the past 10 years, said Michael Kokalari, chief economist at VinaCapital.
The VN-Index, which represents the Ho Chi Minh Stock Exchange (HoSE), sold off by 16% from mid-September until end-October, before recovering somewhat since the end of last week, despite the fact that the country’s economy is now recovering from its slowdown at the beginning of this year, he said in an economist’s note released on Thursday.
Kokalari explained that the sell-off was driven by three key factors: the depreciation of the Vietnamese dong, which prompted concerns that the State Bank of Vietnam (SBV) would significantly tighten monetary policy, and also prompted some selling by foreign investors; the announcement of Vingroup's (HoSE:VIC) $250 million convertible bonds, which is exchangeable into Vinhomes (HoSE: VHM) shares (VIC and VHM account for about 10% of the VN-Index); and margin calls by local securities companies, plus rumors of a clampdown on certain unofficial sources of margin lending that appear to have prompted an unwinding of highly leveraged speculative positions on October 17.
“In addition to the three Vietnam-specific factors outlined above, the 60 basis point increase in 10 year U.S. Treasury yields from mid-September to end-October plus geopolitical issues also weighed on emerging market stock markets, with the MSCI Emerging Markets (MSCI-EM) Index falling 5% from mid-September to end-October,” he noted.
Moreover, Q3 earnings have generally been lackluster, which also weighed on investor sentiment to some extent, he added.
Finally, the circa 4% year-to-date depreciation in the value of the Vietnamese dong as of end-October was driven by a 6-7% increase in the U.S. Dollar/DXY index from mid-July to early-October, coupled with the fact that the SBV’s aggressive rate cuts in H1 left short term interest rates in Vietnam a record 500 basis points below short-term USD interest rates, the VinaCapital chief economist said.
The USD-VND exchange rate depreciated by 0.7% on August 15, which was its biggest daily depreciation in nearly one year, he noted, adding this ultimately prompted the SBV to modestly tighten monetary policy.
Kokalari also noted that the SBV typically acts to prevent annual depreciations in the value of Vietnam’s currency by more than 3%, and it had depreciated by about 3% in late-September.
Specifically, the SBV drained nearly $9 billion worth of Vietnamese dong from the country’s money market from September 21 until end-October, but it did not hike policy interest rates to protect the currency – in contrast to the recent, unexpected policy rate hikes in the Philippines and Indonesia (although the currencies of Vietnam’s regional peers depreciated by about 2 percentage points more than the VND did from mid-September to end-October).
“The possibility that the SBV would significantly tighten monetary policy – or even hike policy rates - was probably the biggest factor weighing on the stock market during the correction because the fall in deposit rates was one of the main drivers of the increase in the market earlier this year,” he commented.
“The fact that the USD-VND exchange rate has stabilized at current levels for the past several weeks without the SBV having to resort to rate hikes, together with the fact that the rally in the U.S. Dollar appears to be running out of steam – especially after last week’s weak employment and ISM Purchasing Managers Index (ISM/PMI) numbers – makes us confident that the SBV will not hike rates in the months ahead,” he said.
VinaCapital expects the USD-VND exchange rate to finish 2024 with a circa 3% depreciation, with the currency supported by a surge in Vietnam’s trade surplus from 3% of GDP in 2023 to 7% in 2024, he said, noting that expectation is reinforced by the sudden about 1% appreciation in the value of the Vietnamese dong over the last few days, bringing the year-to-date depreciation in the value of Vietnam’s currency back to 3%.
The investment fund also expected EPS earnings growth to rebound to 35% year-on-year in Q4/2023 and 20% in 2024 largely because the sharp slowdown in Vietnam’s economy earlier this year has clearly ended, evidenced by a rebound in GDP growth from 3.3% year-on-year in Q1 to 4.1% in Q2 and 5.3% in Q3.
“The main factor weighing on Vietnam’s economy had been a slowdown in exports to the U.S., but high-frequency economic data for October confirmed our recent assertions that Vietnam’s manufacturing activity and exports are now recovering, reinforcing our expectation that GDP growth will rebound to 6.5% next year,” said Kokalari.
He held that despite those clear signs of a recovery in Vietnam’s economy, at the bottom of the sell-off valuation of the VN-Index on both a forward P/E and P/B basis fell to a level that was as cheap as it had been only twice in the past 10 years.
Furthermore, Vietnam’s stock market trading volume more than halved from $1.3 billion before the sell-off to $500 million in late October. Stock market technicians characterize reduced selling enthusiasm during a sharp market decline as a likely sign that the market will enjoy a robust rebound once the factors causing the sell-off abate, which helps explain the fairly strong performance of the market at the end of last week, Kokalari added.