- The country’s CPI declined by 0.09% m/m, but was up by 4.46% y/y. While most sub-items saw slight increases, healthcare services and transportation prices declined by 5.85% m/m and by 0.52% m/m respectively. Lower transportation prices was the result of two gasoline price cuts on Jun 22 and on Jul 23. Since most Vietnamese hospitals are public ones, the government has the power to alter service prices. It has deliberately held back on price increases in recent months to contain inflation pressure (the government’s target is 4.0% inflation in 2018). It has increased healthcare service prices steadily from 2016 during a low inflation period, but has engineered a small price cut in May of this year. Core inflation, which excludes food, energy and state-controlled services, rose moderately by 0.15% m/m and by 1.41% y/y.
- The Vietnamese Dong weakened during the last two weeks, and is now trading at VND 23,285 mid-price against the US dollar at the Vietcombank. The national currency has depreciated by 2.7% ytd, and by 1.5% in 1m. The State Bank of Vietnam’s (SBV) reference rate is 22,669, having depreciated by 1.1% ytd. The SBV’s active participation in the fx market, selling USD close to the upper end of the currency band (+3% from the reference rate) helped to contain speculation in the system. In the past, the Vietnamese currency market was often characterized by speculation as Vietnamese people hoarded the USD which was perceived as a safe-haven’ investment. What is different this time is that the SBV has sold the USD closer to the higher end of the band rather than to the lower one. This demonstrates monetary flexibility with the intention to smooth out the Dong’s steady decline against the greenback, but not to reverse this trend. The USDVND movement so far this year has been in line with the global strength of the USD (the trade-weighted dollar index ICE went up by 2.69% ytd). President Trump has started to talk down the dollar, while the Chinese finally appear to take measures to stop the decline of the CNY. In fact, the ICE softened a bit during the last couple of days. Our current 2018FY estimated depreciation for the VND against the USD is 3.0%, which we still think is realistic. But we will monitor the currency movements carefully.
- Foreign Direct Investment (FDI) disbursement was USD 9.8bn in 7M/2018, +8.8% y/y. We recently talked to the management of the Kinh Bac Corporation, the largest industrial park provider in Vietnam. These people told us that FDI continues to be strong, and that the country will receive more than 200 suppliers of Samsung, which is the biggest FDI company in Vietnam. In the first seven months of this year, Vietnam recorded a trade surplus of USD 3.0bn. These positive factors are supporting the VND, which has generally been stronger than other emerging market currencies.
- Government spending in investment and development has accelerated toVND 150 trillion in 7M/2018, up from just VND 35 trillion in Q1/2018, lending the economy further support.
Stock market highlights:
- The VN-Index declined by 1.8% in USD terms and by 0.5% in VND terms. Removing the impact of the USD strength, the VN-Index moved rangebound in July. Trading volume decreased somewhat to USD 218mn, which is the daily average of all three bourses. Foreign investors continued to be net sellers to the extent of USD 109mn, similar to the amount in June. On a positive note, the outflow has eased towards the end of July. A similar pattern was seen in other regional emerging markets such as in Thailand, in the Philippines, and in Malaysia.
- After markets have corrected significantly since the middle of April, we now observe that many stocks are trading sideways. Valuations have become more attractive. Of note, many bank stocks have corrected 30-50% from their April peaks. Valuations of the banking sector have come down to more reasonable levels (average 2018F P/B of 1.9x), and the banking system risk has eased too: 1) a large part of the Vietnam Asset Management Company’s (VAMC) special bonds have been amortized; 2) rising property prices have given lenders more leeway to sell collaterals, helping them to resolve the problem with non-performing loans (NPL). NPL has caused headache for the banking sector in recent years because of legal constraints and because of still large gaps between buyers’ and sellers’ price expectations. Please refer to our recent publication on the banking sector for more details. The second group of stocks that may offer interesting opportunities are state-owned enterprises that were privatized via IPO earlier this year: PV Power Corporation (POW) and Binh Son Refinery (BSR) are down by 30% and by 50% respectively from their listing prices. They are now trading at 2018F P/E’s of 11.8x, and of 6.7x respectively.
- The Q2 earnings announcement season is under way. So far, there are no negative surprises from the companies that we cover. Corporate earnings, which are in line with expectations, and much lower margin trading levels indicate that domestic risks have eased. However, as Vietnam’s equity market is now more open to global flows (as demonstrated by the higher correlation between the VN-Index and the MSCI Emerging Market Index), external risks remain elevated. The increased international uncertainties are likely to lead to continued elevated volatility in the next couple of months. But given more reasonable valuations and still robust business activities, we recommend investors to be prepared to pick up proven value stocks with strong fundamentals. At the end of July, the top 50 stocks by market cap were trading at a 2018F P/E and a P/B of 19.8x and of 3.2x respectively. To compare, our BUY recommendation list has an aggregated 2018F P/E and P/B of 11.0x and of 1.1x.
Invest with us:
Furthermore, we offer our clients Discretionary and Investment Advisory Mandates to invest in listed Vietnamese equities. Feel free to get in touch with us at your convenience.
Featured image credit: pixabay.vn