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Strategy — Of FOLs and Money_The Diamond Edition

20/12/2019 - 08:39

Diamond ETF to shine in 2020. The VN Diamond Index of full-FOL or nearly full-FOL stocks was officially announced by HOSE in Nov 2019 but the ETF has not yet been launched. Market chatter is for a January entrance for this product, but we suspect it will be later than that given the early Tet holidays. Regardless, the constituent shares have already rallied (and faded) on domestic investor opportunism. Consensus expectations are currently cautious, but this could change quickly. We believe that the product will attract reasonably strong interest from foreign investors seeking exposure to the full-FOL names.

Knowns & unknowns. We know the index components (see the table at left) but not much else. The weightings in this report are estimates based on the stocks’ free float market capitalizations adjusted for the 15% cap on single stocks and 40% cap on single industries. Without these caps, the banks would account for 52% of the index. As for the potential inflows, estimates that have run as high as US$500m appear overly stretched—we think assuming US$50-100m is more reasonable for now.

Screening for the liquidity impact. Having deduced that capital flows into low-volume stocks tend to drive share prices up, we ran a screen to estimate the number of days of turnover that a range of possible inflows would represent for each VN Diamond component. Based on our index weighting estimates, the impact appears most meaningful for TPB, CTD, GMD, TCB, and KDH based on the stocks’ recent daily turnover.

Domestic investors may start buying these names (again) in the run-up to the ETF’s launch. It may be cold comfort to those of us who can’t participate yet, but we suspect that fund managers who hold these full-FOL names can look forward to solid performance results in 1Q20.

4Q19: Stick a fork in it. We see no need to belabor the point, but suffice to say that our contrarian call for a rally in 4Q19 has not worked out.

But we believe the market should rally in 1Q20, in part as a seasonal phenomenon but also with potentially extra liquidity for the VN Diamond constituents, from both “early” local punters and later from the ETF itself. We are more cautious on the overall outlook for the remainder of 2020.

Top picks: VHM in property; STB as a longer-term turnaround play in the banks; POW as a proxy on energy demand; and HCM as a long-term play on the development of Vietnam’s capital markets—or as a hedge if you’re underweight the market ahead of our expected 1Q20 rally.

Please access the link for our complete report: Strategy — Of FOLs and Money_The Diamond Edition

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