Navigating Vietnam 2023 – Investing with responsibilities for sustainable growth

• Our key message this year is “investing with responsibilities to protect your wealth, your corporates and the sustainable growth of Vietnam equity market”.
• We believe a 14% earnings growth and a re-rating in equity regarding loosening financial conditions will carry the VN-Index back towards the 1,300-1,350 level.
• Key catalysts to watch are Fed’s rate hiking pace and Vietnam’s aggressive policies to address the bottom-neck of corporate bond (CB) market.

When will the central banks start loosening the financial conditions?

We believe this is the key question for 2023. The answer will depend on whether inflation would be brought down to more comfortable levels. Though several debates on when rates will peak, we expect the Fed fund rate to inch up to 5% within the 1H23 and a first gentle 25bp cut in to be implemented in 1Q24. Based on the last hiking cycle, the first Fed cut came roughly 7 months after that.

Vietnam economy strong growth upturn will fade into 2023

In 2023, Vietnam will reckon with low export growth, high interest rates, declining but uncomfortable level of global inflations, tight liquidity, likely rising debt distress in residential property area. Macro tailwinds will be few, perhaps in the form of infrastructure development as a part of public investment and robust energy transition. We expect 2023F GDP to grow 6.7% yoy, lower than 2022F of 7.9% but slightly higher than Government‘s guidance of 6.5%. We see the China ‘s reopening and growing FDI competition among regional peer are likely variable factors to Vietnam‘s growth outlook.

Pressure on interest rates and currency will ease considerably in 2H23

USD is expected to maintain its strength throughout 2023. But a combination of improving FX reserves together with Fed‘s less hawkish stance sometime in mid-2023, would mark an end to the sharp VND drop and provide a potential reversal of about 1-2% appreciation against US$ at end-2023. We expect Vietnam’s FX reserve to recover to US$102bn at end-2023 from current ~US$89bn. Increasing probability of global tightening liquidity backstop provides headroom for State bank of Vietnam to keep the policy rates unchanged from now on. Then, deposit rates will stay flat in 1H23 and gradually cool down since 3Q23, in our view.

2023 will be a year with two halves

For the early 2023, we believe market is still under stress of liquidity constraints and rising corporate bond default risks. Thus, an uptrend from trough valuation amid weak liquidity might fragile and volatile, in our view. We are more confident and expect an inflection to materialise in 2H23 as a re-rating in equity market is often triggered within 4-6 months ahead the first rate cut. Thus, we advocate “value” and “dividend plays” for near-term defensive strategy and switch to “growth-seeking” as moving into 2H23.

Market could have a decent year from trough valuations

We believe VN-index succumbed to market negative sentiment in 2022, not its fundamentals. We expect the VN-Index head to 1,300-1,350 level in the 2H23; based on 12x – 12.5x FY23F P/E and 14% yoy earnings growth. Downside risk to the market includes inflation pressures remain high enough that central banks are unable to loosen the financial conditions soon. Upside catalysts include aggressive supporting policies to be implemented to tackle the corporate bond issues and the earlier-than-expected MSCI EM upgrade of Vietnam.

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