According to a recent report by Tien Phong Securities (TPS), the Vietnamese stock market is poised to enter a new growth cycle, supported by three key factors.
TPS highlighted that despite being relatively young compared to other global stock markets, the VN-Index experiences economic cycles. These cycles typically begin when the market enters a phase of monetary easing, accompanied by reduced interest rates, stable exchange rates, and increased market liquidity, as investors become more optimistic and business performance hits bottom.
Currently, after the tightening measures implemented in 2022, the market’s monetary policy is starting to loosen, and exchange rates remain stable. Corporate profits also appear to have bottomed out in Q1 of 2023. As a result, TPS expects that the Vietnamese stock market is entering a new growth cycle, with three supporting factors identified by their team.
Firstly, there is monetary policy easing. The State Bank of Vietnam (SBV) has reduced interest rates four times since the beginning of the year, bringing the refinancing interest rate down to 4.5%. Deposit interest rates have also decreased, currently standing at 7.2% in the top four banks. The SBV’s interest rate cuts are beginning to have positive effects on the Vietnamese stock market. Time deposits of 6 months to less than 1 year, which had high interest rates in late 2022, have matured, and the efforts to lower deposit interest rates have partly redirected this money back to the stock market, reflecting positive factors that have emerged over the past year.
Secondly, there is exchange rate stability. The USD/VND exchange rate at Vietcombank has decreased by 4.9% compared to its peak in 2022. This decline is attributed to reduced tightening measures by the U.S. Federal Reserve (Fed), which is entering its final phase and relieving pressure on the VND exchange rate. Stable exchange rates provide room for the SBV to pursue loosening policies. Moreover, the fact that the Fed has not yet decided to reverse its policy at the current time helps stabilize investor sentiment. Historically, when the Fed has lowered interest rates, stock markets have experienced declines during economic crises. However, the current circumstances suggest a different trend.
Thirdly, there is a more positive investor sentiment. Individual investors have become more optimistic about the market outlook since the most negative factors occurred and were reflected in the market in 2022. Additionally, other investment channels have become less attractive due to declining savings interest rates caused by SBV policies. The bond market still faces unresolved issues, and real estate is burdened by legal concerns and high debt. Securities companies have also implemented stimulus programs since the beginning of 2023, including reducing margin interest rates and offering zero brokerage fees and incentives for new customers.
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As a result, the market has shown signs of excellence since late April 2023, with liquidity continuously surging, averaging over 12,000 billion dong per session in the past month. The number of newly opened accounts has also grown in May.
The analysis team expects that valuation is gradually becoming attractive after the interest rate cuts, which is another supportive factor for the market. The average E/P ratio of the VN-Index in May and early June has been around 8% (excluding a dividend yield of 1.7%). The gap between the E/P ratio and the 1-year term deposit interest rate in state-owned banks (at 7.2%) has significantly narrowed as market valuation has increased due to less negative Q1/2023 business results.
“While the current discrepancy may not yet be truly attractive for investors to aggressively allocate funds into the stock market, as was the case in the late phase of last year, with the forecast that market earnings will bottom out in the first half of 2023 and gradually improve thereafter, along with the potential for further declines in deposit interest rates due to SBV policies, the stock market will become more appealing. Therefore, this remains an opportunity for investors to increase their allocation or enter into this trend,” the TPS report concluded.