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Market Strategy October 2022 – Recalibrating investment strategies for higher interest rates

Strategy Note 03/10/2022    121

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Market saw no relief in September with rising interest rates and growing VND downward pressure. In 23 Sep, State bank of Vietnam has kicked off the policy rate hike by 100 basis points, marking the first increase since late-2011. Additionally, VND has depreciated 4.5% on USD upside pressure. VN-INDEX plummeted 11.6% mtd and 24.4% ytd to 1,132.1 pts, the lowest level in 20 months. Average trading value of three bourses plunged 14.0% mom and 40.5% yoy in September. Notably, foreign investors turned into net seller with outflow of VND3,641bn.

Rising risks of corporate earnings downgrades. Increasing cost of debt and subdued global demand might dent the earnings prospect of high leveraged corporates in the next coming quarters. We still maintain our forecast of 23% yoy for listed corporates earnings growth in FY22 but we expect some FY23 earnings downgrade after the 3Q22 results to be released.

So now the big question is – have the markets sufficiently priced-in these headwinds? As at 30 Sep, VN-Index was trading at 12.2x trailing P/E, which is 31% discount to the peak and even lower than the average P/E of 16x during 2017-2019 when the deposit rates were higher. We believe VNIndex now offer valuation buffers. Basing on our forecast of 23% yoy earnings growth, we estimate current Earnings to Price of VN-INDEX is about 9.3%. Together with dividend yield of 1.7%, the market earnings yield is estimated about 11.0% which is still attractive versus 12M deposit interest rates of commercial banks (average at 6.4-6.5% by the end of 2022F).

We are still more cautious in Oct amid near-term market volatility. 3Q22 earnings season will kick off in early Oct and good news often come first. We expect strong yoy earnings growth of Travel & Leisure, Automobiles, Retail and F&B due to the low base last year. Market also wait for the US inflation data to be released in 13 Oct. As there are no strong upside catalysts, we cautiously forecast the VN-INDEX to fluctuate within 1,050-1,180 points in October.

Recalibrate investment strategies for higher interest rates. High interest rates may linger in the coming quarters thus it is prudent for investors to switch into undervalued investing and dividend plays. We advocate exposure to stocks that has net cash per share but are traded under book value which might offer better margin of safety.

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