Vietnam Stock Market Sell-Off

Transcription

1 Market Commentary July 6, 2018 Vietnam Stock Market Sell-Off The current sell-off in Emerging Market stock markets was initially triggered by a surge in the US Dollar, DXY index from late April. This week, concerns that China s currency and stock market may repeat the turmoil endured in 2015 prompted more EM weakness including a 4.4% drop in Vietnam s VN-Index (VNI) on Tuesday despite guidance from China s government that it does not want the Yuan to depreciate by more than 4% YTD. Vietnam s stock market is swept up in the EM bear market. The selloff of the VNI is being driven by exogenous factors, despite the country s strong economic conditions, despite the relative stability of the Vietnam Dong (-1.8% YTD), partly due to the State Bank of Vietnam s (SBV) commitment to stem VND deprecation at 2%, and despite the fact that Vietnam is not highly vulnerable to the risk factors causing alarm in other EMs. Although it is difficult to foresee what is next for EMs and/or the Dollar, it is clear that Vietnam is better positioned than most of its EM peers to weather the current storm. There are a few specific issues that are moderately worrying, but the overall relative outlook for Vietnamese stocks is much better than for other EMs. VIETNAM S VULERABILITY TO THE RISK FACTORS DRIVING THE EM SELL-OFF The surge in the Dollar, rising oil prices, and trade tensions have spawned several well-publicized concerns among EM investors. Vietnam s vulnerability to each of those risk factors is listed in the table below: RISK FACTOR VIETNAM VULERABILITY ASSESMENT We expect a 3%/GDP C/A surplus in Vietnam this year Current Account (C/A) Deficits USD Denominated Debt EM Asia Interest Rate Hikes Trade Tensions C/A deficits in India, Indonesia, and 10%/GDP trade deficit in the Philippines drove 6-8% YTD currency depreciations in those countries Vietnam has run C/A surpluses for the last six years, supported by an eight-fold surge in high tech exports, which was in turn driven by 7.5%/GDP FDI inflows We estimate that the aggregate external debt of Vietnamese private sector corporations is about 20%/GDP Vietnam s external debt is about 50%/GDP, but most is owed by the government to the World Bank / ADB / etc. or by government related entities (e.g., SOEs) Vietnam real policy rates are slightly below 2%, but the government should be able to avoid tightening monetary policy if VND depreciation < 2.5% YTD SBV has pledged to support the Dong in order to prevent depreciation in excess of 2% YTD; VN s central bank has ~30%/GDP of FX reserves (USD64 billion) The Philippines, Indonesia, and India hiked rates in 2018 to stem FX depreciation The US is unlikely to directly target Vietnam, given its geopolitical ambition to contain China s regional expansion Vietnam would ultimately be the biggest beneficiary of a protracted trade war between the US and China, according to Standard Chartered and others About 60% of US high tech imports come from China, but only 20% of Vietnam s exports

2 to the US are electronics, smart phones, etc., implying enormous potential displacement of electronics production from China to Vietnam Oil Prices Carry Trade Outflows Vietnam is a 1-2%/GDP net energy importer, versus oil/energy imports equivalent to 45-75%/GDP in China / India / Philippines that degraded C/As Oil effectively accounts for about 1% of Vietnam s CPI basket, which is comparable to other EMs India and Indonesia recently endured hot money outflows by investors that previously sought to profit from the higher yields in those currencies, vs developed market (DM) interest rates Foreign financial investors own an insignificant fraction of outstanding Vietnam Government Bonds (VGB) versus nearly half in Indonesia at the peak In addition to the risk factors above, which are universally credited for driving the current EM selloff, certain countries also face government budget deficit challenges caused by government profligacy (Argentina and Brazil), or by energy price subsidies (India). This particular risk factor for EM stock markets is not nearly as endemic as it was during the 2013 taper tantrum because the worst offenders at that time (including Indonesia) subsequently took meaningful steps to address their twin deficit problems (i.e., budget deficit and current account deficit), as did Vietnam, which reduced its government budget deficits from 5%/GDP in 2013 to 3.5% last year. STRONG, STABLE ECONOMY Vietnam s GDP growth surged from 5.7% in 1H17 to 7.1% in 1H18, with the 1.4%pts improvement in growth from H1 last year attributable to improvements in the manufacturing, mining, and agriculture sectors, to a reversal of Vietnam s ~2.6%/GDP trade deficit in 1H17 to an estimated 2.2%/GDP trade surplus in 1H18, and attributable to 8.6% yoy growth in household consumption, which contributes an estimated 65% of GDP. Growth prospects for H2 look equally strong; Vietnamese consumers are the fourth-most optimistic in the world, according to market research company Nielsen, and the country s PMI survey of manufacturers sentiment had its second biggest monthly surge ever to a 55.7 PMI reading in June. Inflation and Trade Balance Concerns A sudden surge in inflation from 2.8% yoy in April to a 4.7% yoy increase in Vietnam s CPI in June (the highest in Asean), hurt investor sentiment, as did Vietnam s USD900 million trade deficit in May (and anticipated USD100 million deficit in June), following a string of four consecutive monthly trade surpluses from January through April. That said, inflation is currently being boosted by the low base effects of oil prices, and by specific factors that led to a divergence between food price inflation in Vietnam and China. Both of these effects should abate as 2018 progresses, which would bring inflation back below the government s 4% target by the end of the year. Oil prices are currently about 60% higher than a year ago, but the year-on-year increase is set to shrink to about 20% yoy by the end-2018, assuming oil prices remain around their current level. Next, food prices in Vietnam increased 5% yoy, but Chinese food prices are only up about 1% yoy, which should temper Vietnamese food price inflation in H2, as cheaper food from China should cap local food price increases. Finally, note that Vietnam s month-to-month trade statistics are volatile, and we still expect Vietnam to run a circa 3%/GDP trade surplus and current account surplus in

3 VIETNAM-SPECIFIC FACTORS INFLUENCING THE STOCK MARKET AND DONG Foreign flows are a major driver of Vietnam s recent stock market performance, given that the current sell-off is being driven by exogenous factors, and given the propensity of domestic retail investors (who account for about 85% of trading activity) to base their speculative stock market trades on foreign flows, to a certain extent. We estimate that inflows were about USD3.7 billion in H1 (including USD1.5 billion of inflows via the stock exchange, and USD2.2 billion YTD offmarket trades), versus net foreign outflows from the stock markets of Thailand (-USD5.6 billion), Indonesia (-USD3.6 billion), and the Philippines (-USD1.2 billion). Vietnam s attractive stock market valuations compared to its EM Asean peers should encourage foreign investment inflows. The market is now trading at 14.5x FWD PE, versus 16.4x for EM Asean (Thailand / Malaysia / Indonesia / Philippines), and Vietnam s stock market has a.8x PEG ratio, versus a circa 1.2x PEG ratio for EM Asean. IPOs and SOE Divestments made a meaningful contribution to foreign inflows this year, which boosted both market sentiment and the VN Dong. For example, the oversubscriptions to the listings of Techombank, VP Bank and HD Bank fueled a 26% outperformance of the listed banks to the VN-Index at the market s peak in April. That said, the Techcombank IPO and/or the IPO of Yeah1, a technology company, probably signaled a temporary closing of the IPO/Privatization/SOE stake sale window until the end of the year. Combined IPO/ privatization / SOE stake sales proceeded at a brisk pace in H1, raising an estimated USD4.3 billion in proceeds (compared to USD9.5 billion of privatization and SOE proceeds only over ), but the upcoming OCB and VIB bank IPOs will almost certainly be postponed, as will the government s USD11 billion pipeline of IPOs of companies such as Mobifone, Vietnam Tobacco, and Vietnam Cement. Privatizations were somewhat impeded in H1 by the government s unrealistic valuations, which in turn contributed to a failure to attract strategic investors. The prospects to accomplish the government s USD5.6 billion pipeline of SOE stake sales in companies such as PV Gas, Vietnam Airlines, and Airports Corporation of Vietnam look more promising, especially with the 25% (average) owner stakes that are on offer, and the generally better quality companies investors are being offered stakes in, although one of the impediments entailed will be the current statutory restriction to offer the shares at a discount to prevailing market prices. The devaluation of China s currency disproportionately impacts sentiment towards Vietnam s stock market and FX exchange rate. In 2015, Vietnam s stock market was up 20% YTD in the middle of the year, but quickly plunged by about 15% around August due to the unexpected depreciation China s currency at that time. The VNI ended the year up 6%, with diminished performance in the equity market attributable to a ~5% depreciation in the value of both the VND and the CNY against the USD that year. The VND plunged in 2015, despite Vietnam s solid economic fundamentals, including: 6.7% GDP growth, inflation below 1%, and a modest trade surplus, and despite the SBV spending approximately USD6 billion of FX reserves to support and stabilize the VND in the lead up to the Communist Party Congress in early 2016 (Please follow this link for our report that gives a more detailed analysis). The depreciation of the CNY impacts sentiment in Vietnam s stock market and currency market disproportionately owing to some misconceptions held by locals about the impact of CNY 3

4 depreciation on Vietnam s economy. One misconception is that Vietnam would be compelled to respond to CNY depreciations with depreciations in the value of the Dong in order to maintain Vietnam s export competitiveness vis-a-via China. However, factory wages in Vietnam are only about one-third those in China, and wage growth in both countries is about 7%/p.a. so a few percentage points deprecation in the VND-CNY rate has minimal impact on Vietnam s relative export competitiveness. Next, some observers erroneously believe that a depreciation in China s currency vis-à-vis Vietnam s will exacerbate Vietnam s USD17 billion (7.7%/GDP) trade deficit with China, thus degrading Vietnam s overall trade balance. In actuality, the appreciation of the VND against the CNY would initially shrink Vietnam s trade deficit with China because the price of Chinese imports would fall in VND terms. Vietnam s imports from China are predominately capital goods and other production inputs, so a cheaper CNY would actually lower the cost of manufacturing in Vietnam, which would ultimately support export growth. The net result would be a higher trade deficit with China (driven by the import of more intermediate goods), but a negligible impact on Vietnam s total trade balance. Derivative Trading was introduced in Vietnam with the October 2017 launch of futures contracts. Although still in its infancy, and characterized by very simple products (covered warrants are set to be introduced by September), Vietnam s derivatives market has been fueling recent stock market volatility, as did the initial introduction of derivatives in China. The deflation of the Vietnam Government Bond (VGB) bubble is contributing to weak stock market sentiment even though Vietnam s anomalous bond market behavior in does not materially impact the economy or the stock market (the artificially low 10Y yield indirectly influences stock prices due to its use as an input in valuation models, but retail stock market speculators dominate trading in Vietnam). To summarize recent developments, the 10Y VGB yield bottomed in early March at 4%, after having fallen 120bps YTD (and by 90bps last year), but bond yields subsequently rebounded to about 4.75%. This rebound was partly driven by a surge in Asia EM bond yields; Indonesia bond yields increased 140bps to 7.7% this year due to the hot money outflows by carry trade investors mentioned above. In addition, tightening liquidity in the local money market, which is discussed in the next bullet point, is also depressing bond prices. Low interbank rates fueled the above-mentioned VGB bubble, but interbank rates are headed higher because the SBV has started aggressively draining liquidity from the banking system to combat the recent pop in inflation; the SBV drained over USD6 billion from the interbank market in June alone. Furthermore, a major source of excess liquidity has been the unsterilized accumulation of FX reserves amassed as a byproduct of the above mentioned IPOs / privatizations / SOE stake sales, but this source of FX inflows has probably dried up for the time being. To summarize the situation, foreign investors brought USD to Vietnam in order to pay for their purchases of stakes in companies such as Sabeco (ThaiBev paid USD4.8 billion for its 53% SAB stake). These substantial USD inflows augmented existing Dollar inflows in the form of FDI (7-8%/GDP) and overseas remittances (4-5%/GDP), as well as from the 2-3%/GDP trade surplus in both 2H17 and 1H18. The resulting huge aggregate inflow of foreign capital enabled the SBV to acquire USD13 billion of FX reserves last year, and USD11 billion in 2018 YTD, lifting the SBV s total FX reserves to USD63.5 billion at present. However, the central bank paid for the FX reserves with freshly printed VND which has boosted interbank liquidity and depressed interbank rates to below 2% almost continuously for the last year. 4

5 None of this materially impacts Vietnam s economy or impedes loan growth by banks to endborrowers, but many stock market investors believe that the inevitable increase in interbank rates, which are still around 1%, will also damage stock market sentiment. Liquidity premiums among individual stocks are currently determining the market s winners and losers even more so than usual. For example, in the banking sector, stocks that have high daily trading volume, available foreign ownership room, and relatively large market capitalizations are trading at a circa 30% P/B valuation multiple premium to the less investible names in the sector. This liquidity valuation premium exists among bank stocks despite the fact that the business prospects of some of those less liquid bank stocks are superior to those of many of the large cap, liquid banks. The foreign ownership limit (FOL) for the vast majority of listed stocks in Vietnam is 49% (some companies have opted to increase their FOLs to 100%, and all bank stocks are still limited to a maximum 30% FOL). Consequently, foreign investors that want to buy stocks which have already reached their foreign ownership limit (such as ACB, PNJ, and FPT) must pay an FOL premium to acquire shares from another foreigner (that premium varies considerably from stock-to-stock, but is often around 7% for ACB). This means that a substantial proportion of stock market trading happens outside the stock exchange, and that marginal demand by foreign investors does not necessarily directly influence the price stock market investors see on the screen. For example, Vietnam s net stock market inflows were about USD3.7 billion YTD in H1, but this figure includes USD1.5 billion of inflows via the stock market and our estimate of off market trades that contributed to net inflows. Another explanation for the liquidity premium effect is the limited free float of many individual names due to concentrated ownership by strategic investors, as well as by the government in the case of partially privatized SOEs. Two examples are Sabeco, which only has an 5% free float because of the large strategic stake held by ThaiBev, and PV Gas which only has an 4% free float because the government still owns 96% of the company. Some investors track the significant divergences in the day-to-day movements of the VN-Index, the calculation of which is solely based on the market capitalizations of stocks listed on the Ho Chi Minh Stock Exchange (HOSE), and the VN30 index, which also considers the free floats of those HOSE-listed stocks in its composition. The latter is intended to be an easily replicable index, which is suitable to be tracked by ETFs (no ETFs are based on the VN-Index, partly due to this free float issue). Disclaimer 2018 VinaCapital Group (VCG). All rights reserved. This report has been prepared and is being issued by VCG or one of its affiliates for distribution in Vietnam and overseas. The information herein is based on public sources believed to be reliable. With the exception of information about VCG, VCG makes no representation about the accuracy of such information. Opinions, estimates and projections expressed in this report represent the current views of the author at the date of publication only. They do not necessarily reflect the opinions of VCG and are subject to change without notice. VCG has no obligation to update, amend or in any way modify this report or otherwise notify a reader thereof in the event that any of the subject matter or opinion, projection or estimate contained within it changes or becomes inaccurate. Neither the information nor any opinion expressed in this report constitutes an offer, or an invitation to make an offer, to buy or to sell any securities or any option, futures, or other derivative instruments in any jurisdiction. Nor should it be construed as an advertisement for any financial instruments. Officers of VCG may have a financial interest in securities mentioned in this report or in related instruments. This research report is prepared for general circulation and for general information only. It does not have regard to the specific investment objectives, financial situation or particular needs of any person who may receive or read this report. Investors should note that the prices of securities fluctuate and may rise and fall. Past performance, if any, is no guide to the future. Any financial instruments discussed in this report may not be suitable for all investors. Investors must make their own financial decisions based on their independent financial advisors as they believe necessary and based on their particular financial situation and investment objectives. This report may not be copied, reproduced, published, or redistributed by any person for any purpose without the express permission of VCG in writing. Please cite sources when quoting. 5