Vietnam Strategy: Time for a breather in 2Q19
04/04/2019 - 08:23
Vietnam Strategy — Time for a breather in 2Q19
The Year of the Pig came in like a lion, but in our view a period of lamb-like consolidation is due in 2Q19. Vietnam’s attractive macro story has generated strong foreign ETF inflows YTD, but global central bank (GCB) policy is a risk given mixed economic data in the major economies. Also, external political risks remain high (e.g., Brexit, the trade war, and crises in other emerging economies). Although these don’t touch Vietnam directly, such events could influence capital flows here – which supports our argument for a cooling-off period in 2Q19.
We maintain our view for a stronger 2H19 on persistent investment allocations encouraged by GCB softening. Select banks may face pressure from regulation on unsecured consumer loans, but we remain positive on BID and STB. We also like select consumer names (MSN, PNJ, DGW). We are Overweight securities firms (HCM, VND) but acknowledge that tepid 2Q19 market conditions may pressure these stocks. Despite the leading real estate developers’ strong YTD performance, we are fundamentally cautious on the sector given our view on the property cycle.
Themes and catalysts
- Domestic macro looks solid. FDI, the VND, employment, and domestic demand should remain buoyant.
- But the stock markets may consolidate as foreign flows slow seasonally in 2Q19.
- Global central banks will probably soften further in 2H19.
- Global CB policy and external geopolitical risks.
- MSCI Frontier Index rebalancing in May.
- Pace of domestic capital markets reform.
- Restrictions on cash loans.
Tactical outlook: Consolidation in 2Q19. The VNIndex has risen 8% YTD but is 3% off its March 14 high. We reckon that a cooling-off period is likely in 2Q19, but we retain our bullish view on 2H19 market liquidity. Our 990 index forecast has already been beaten, but remains our target for 2Q19. But we increase our yearend target to 1,100, implying 12% upside and 14x consensus 2020E PER.
Foreign portfolio flows: ETFs take center stage. Total foreign net buying in 1Q19 reached US$295m, a decline of 54% YoY and 49% QoQ. The sequential data reflect major deal-related inflows last year that did not repeat in 1Q19, but that we strongly expect to occur again persistently going forward. Parsing the flow data, we find that passive inflows – net foreign net purchases via Vietnam-focused ETFs – reached a record high of US$189m in 1Q19, or 64% of total foreign buying in the quarter. Thus, foreign interest clearly remains very high.
Risks are largely to the upside, in our view. Foreign purchases of strategic stakes in large caps should improve domestic investors’ confidence and could once again compress market interest rates and boost stock valuations. Our sense is that such investments, further softening by global CBs, will largely be a 2H19 story. This informs our expectation for a consolidation period in 2Q19 followed by a more bullish second half.
Long-term outlook remains highly positive. Short term tactics aside, we reiterate our highly positive view on the longer term outlook for Vietnam’s capital markets given the nation’s extremely attractive demographics, the emerging middle class, strong FDI inflows, and eventual MSCI E/M inclusion.