Invest in Vietnam: Your 2016 Outlook Part 2

March 14, 2016

Disclaimer: the opinions expressed herein are that of RongViet Securities and not of VietnamAdvisors.  This is NOT a solicitation to buy or sell securities.

STOCK MARKET

2016 MARKET: THE GROWTH MOMENTUM GOES ON

Specific supporting catalysts for market

However, risks cannot be ignored

There are as many positive factors as negative ones. We believe market will still go on an upward trend of but do not bet on a substantial increase in 2016.

Intermediate-term growth could be maintained back on estimate of listed companies’ business results.

Market EPS (represented by EPS of VNIndex) did not expansion significantly in 2015 but has remained in an intermediate-term growth momentum. We noticed the medium-term growth trend of market EPS reached a turning point in early 2013. Since then, EPS has been growing at a CAGR of 10%. EPS growth reached above the medium-term CAGR in the first half of 2015. However, due to some sudden changes in macroeconomic conditions, including a strong depreciation of the VND and a decline in crude oil prices, positive business results of listed companies were not carried into second half of FY2015. Market EPS then saw a correction and returned to medium-term growth channel and whole-year EPS growth was recorded at 7.5%.

Despite sudden deceleration in late of 2015, 2016’s market EPS is expected to fluctuate in its intermediate-term trend. Under our forecasts, the aggregate net income of 33 listed companies in RongViet Research’s coverage (65% of which belong to mid and small capital stocks), which account for nearly 40% of the total market capitalization of VNIndex, could increase 18% in 2016. Accordingly, EPS growth is projected at 10% in 2016 whereas EPS of mid-and small-cap stocks could grow a bit faster at 14%. Using this list as a proxy for all listed companies in the HSX, we believe market EPS could maintain a growth rate of 10% in 2016.

Foreign investors might still keep their eyes on the stock market

While many stock markets around the world performed poorly, Vietnam’s market index grew more than 6% in 2015. Vietnam’s stocks attracted a total value of VND126 million (-23% y-o-y) of net inflows in 2015 whereas most frontier and emerging markets saw a new withdrawal of capital by foreigners.

Historical data proved that Vietnam had always been a preferred destination for offshore investors. Since 2008, Vietnam’s stock market has always received net foreign capital inflows. Despite the FED’s decision to raise interest rates and depreciation of CNY, we remain positive on capital flows for the stock market in 2016:

Firstly, Vietnam’s stock market has attractive valuation compared with other regional markets

Secondly, the process SOE equitization and divestment is being pushed. The government targets to equitize 123 SOEs and withdraw over VND15.6 trillion from non-core operations this year with many attractive IPOs on the way, including those of Mobiphone, Vinalines, VICEM, Vietnam Expressway

Last but not least, an increase of the FOL can help:
(1) Attract more foreign capital, especially in stocks that have reached limit for foreign ownership;
(2) Increase market liquidity and share prices.
FOL expansion has been a hot topic since 2014 but the story just kicked in 2015.

Aside from a series of legislations, SSC has also suggested that it might lift the regulation the threshold above which companies must classify themselves as a foreign-owned enterprise from 51% to 65%.

With determined moves of the authorities, the FOL increase is now more certain and is expected to be a major market story this year. Both investors and listed companies are taking the matter more seriously. Shortly after SSI announced a full increase of FOL at the beginning of 2016, EVE and VHC decided to do the same.

A LONG-TERM SUPPORT: RECLASSIFICATION TO AN EMERGING MARKET BY MSCI

Vietnam is still categorized in the MSCI Frontier Index, along with Bangladesh, Pakistan and Sri Lanka.
Frontier markets need to meet three sets of criteria to be included it the Emerging Market Index, the criteria are related to:
(1) Economic development, which aims to differentiate between frontier and emerging markets,
(2) Size and liquidity requirements, and
(3) Market accessibility assessment, which is divided into 18 qualitative measures that reflect international institutional investors’ experience of investing in a given market (See Table 9).

Vietnam has implemented a number of mechanisms and new policies to obtain MSCI’s Emerging Market status. However, Foreign ownership limit (FOL) and Foreign exchange market liberalization levels are the most challenging. Decree 60/2015 and other guidelines on FOL lifting are key to the meeting of the former requirement. We believe this could be somewhat resolved by equitizing more qualified companies and pushing of SCIC’s divestures from listed companies.
In addition, Vietnam needs to improve its Foreign exchange market liberalization level. According to MSCI, there have to be changes three areas:
(1) no offshore currency market,
(2) constraints on the onshore currency market such as foreign exchange transactions must be linked to security transactions) and
(3) low liquidity on the onshore currency market.

Vietnam’s regulators have started working on other issues which include market organization and market infrastructure. With Circular 155/2015/TT-BTC relating to information disclosures in English, we believe Vietnam can simultaneously meet the requirements of information flows and equal treatment for foreign investors. Circular 203/2015/TT-BTC on transaction regulations, which include instructions on intraday trading activities, should help boost market liquidity.

We believe the best scenario for Vietnam is to be considered as a candidate in 2018’s MSCI review. If that happens, Vietnam would be considered as an official member of the MSCI Emerging Index in 2019. Until the official announcement is made, there will be a lot of media coverage on the country’s stock market. At some specific periods, such information could help stir market enthusiasm, of course, only in a short time.

Being upgraded to an emerging market is considered as one of the most expected catalysts for Vietnam stock market because it would attract more FII inflows. Besides, large-capitalization stocks, which already satisfy the size and liquidity criteria, would be purchased by foreigners, raising the market in the process. This was what happened with other market indices such as the ADX General Index of Abu Dhabi (+43% after upgrade) and the QE Index of Qatar (+47% after upgrade).

With recent actions by the government, Vietnam is expected to be on the list of potential markets for the 2018 review. Then it will take at least 1 more years for MSCI to make it official announcement.

Related Article

• RongViet Securities 2016 Outlook – Part 1