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Vietnam Equities? BUY!

Posted by admin on May 23, 2020
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From 2000 to 2009, Vietnam’s Gross Domestic Product (GDP) grew at a 10-year annual average of 5.96%. For 2010 to 2014 and 2015-2019, it grew at 5-year annual averages of 5.8% and 6.76% respectively. In 2018, Vietnam posted quarterly GDP growth at 7.65%, 7.45%, 6.73% and 6.88%. For the same periods in 2019, it was 7.31%, 6.82%, 6.73% and 7.47%.

In late January 2016, the Ho Chi Minh Stock Index (VN-Index) started a 2-year bull market that ended in early April 2018. The VN-Index rose from 520 to 1200, an increase of 130%. Beginning June 2018 to end February 2020 (21 months), the equity market essentially traded in a narrow 100-point range between 1000 and 900, finally breaking down in March 2020 with a 26% collapse over 12 days.

In the fight against Covid-19, Vietnam has won plaudits. The Government’s early, swift and strict measures, and regular and transparent communications during the initial outbreak meant that Vietnam has, to date, just 318 confirmed cases of infection and zero deaths. And according to Blackbox Research, a Singapore-based social research agency, Vietnam is ranked second globally (China being number one), in terms of its citizens’ satisfaction with their own government’s response and handling of the pandemic. After a lockdown period in the first 15 days of April, Vietnam quietly returned to “normal.”

Despite global catastrophes and a huge and uncertain economic fall-out, the big picture and fundamental outlook for Vietnam relative to the-rest-of the-world remains good. On-going government reforms and policies show clearly that the country is open-for-business, international investors are hunting for deals, and multinational companies are eager to move manufacturing and production into the land. The demographics are favourable with its young population hungry to learn and its technical professionals hungry to compete. And as for foreign players and tourists – they keep turning up.

When the pace of economic growth accelerated in 2018 and 2019, valuations of Vietnamese companies and other assets got a little frothy. The pandemic brought sobriety and more realistic expectations, and lower asking prices have indeed followed. Thus, from January to April this year, according to government statistics, there were 3,180 companies in which foreign investors acquired stakes, a rise of 33% year-on-year. Japanese (USD 743m), South Korean (USD 356 million) and Singaporean (USD 333million) investors were the most active and aggressive buyers. Citing this increase in M&A activity, the Vietnam Chamber of Commerce has petitioned the Prime Minister to temporarily stop acquisitions to protect domestic enterprises.

Low valuations and prices are also evident in stock prices of listed companies. Since the equity market high 2 years ago, there has been a disconnect between stock prices and economic performance – that is, stock prices lagging and not reflecting actual economic growth, with many real estate, construction, retail and other counters trading at 5-year lows.

Will we therefore, see asset managers, hedge funds and activist traders – whether foreign or domestic – build significant stakes, and push company boards onto stock buy-back programmes or other means to boost their stock prices? Or will we see entrepreneurs with intention to list, to actively buy companies with distressed stock prices and do their own back-door listing rather than pursue the long arduous route to an Initial Public Offering (IPO)? Either scenarios would be bullish for stock prices.

Since 24 March, when the market bottomed at 659.21, VN-Index has added 167.82 points or 25.46%, a performance surpassed only by South Korea at 30% and USA at 27%. The rally has been steady, consistent, and void of volatility. In the 35 trading days since the climatic bottom, VN-Index has seen advances on 26 days and declines on 9, an Advance/Decline ratio of 2.88, unmatched by any other stock index, the next best being South Korea’s Kospi at 2.53, and the rest ranging from 2.16 down to 1.75.

Should the VN-Index push onto first resistance at around 900 and beyond, what must be bought? Which stocks are the strong ones, the leaders, the first off-the-block? Which ones will make the daily Top Gainers and Most Active lists?

So far, the 10 stand-out stocks since the March bottom – the winners – are companies operating in steel (DHM), animal feeds (DBC), real estate (DRH), semi-conductors (AMD), industrial engineering (PTC), seafood processing (CMX), financial services (SVC), oil and gas services (PXS), port operators (CLL) and power lines and stations (PC1). These should be accumulated.

The first 3 of the mentioned stocks have already doubled on the rebound, and yet valuations of all 10 continue to be attractive. Stocks being accumulated always demonstrate strength, and these are no exception. Their Relative Strength reading is high, will stay high and will keep on out-performing the market.

A few technical indicators suggest the market is short-term overbought, that consolidation or a correction is imminent. Strong, high Relative Strength markets and stocks stay overbought, and corrects with the passing of time, not necessarily in price.

Wait for the moment, fill your boots, back-up the truck, get positioned, watch for out-performance and book profits.

Written by William Liu – Financial Advisor

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