Navigating Vietnam 2H22 – Sailing through rough water

We believe the key investment theme of Vietnam is economic trajectory with apparent recovery in a couple of next quarters. We expect the economy to accelerate in the 2H22 with 7.1% yoy for 2022F, underpinned by robust manufacturing expansion and services roaring back.

Vietnam’s exports and private investment performances in 1H22 are outliers which reaffirmed our view that domestic strength would likely buffer against external challenges. However tighter global financial conditions could dampen growth prospects for the global economy, leading to lower demand for Vietnam’s exports in the 2H22, in our view.

We see that State Bank of Vietnam exhibits little urgency to join the hawkish camp and monetary policy is moving in sync with a supportive fiscal push in this year. An interest rate compensation package with a scale of VND40,000bn altogether with VAT cut down to 8% from 10% have been implemented in 1H22. However, we expect the monetary policy would turn more dovish in late 4Q22 with a quantum of policy rates hike at about 25 -50bps.

Inflationary is still top-in-mind-risk. Even though CPI climbed modestly 2.25% yoy in the first 5M22, inflation will accelerate in 2H22 driven by both demand pull and cost push. If the oil price are still elevated, the government would reduce the environmental tax rates for petroleum product. We expect average CPI at 3.5% for 2022, well below the guidance of 4%. Other macro risks include geopolitical crisis and China’s “zero-Covid” strategy, both of which cast shadow over global trade supply chain.

Despite the disappointing performance in 1H22, we remain cautiously optimistic about the equity market outlook in the backdrop of strong macro recovery. We estimate market EPS to sustain the strong average growth of 21% yoy over FY22-23F which also bode well for the index expansion.

In order to evaluate Vietnam market in correlation with the rising interest rates, we use market earnings yield valuation metric which is helpful when there is concern about the rising interest rates and when investors determine optimal asset allocations. We observe that the gap between Vietnam market earning yield and the average 12-month deposit rates of commercial banks is widening which indicates that equity market maybe considered undervalued. In base case scenario, we expect the VNIndex to fluctuate in the range 1,330 – 1,500 pts within 2022; translating into 12.5 – 14.0x of FY22F P/E. Downside risk to the market includes higher-than-expected interest rates while potential upside catalyst are the earlier-than-expected MSCI EM upgrade of Vietnam.

We identify five investment themes for 2H22 and beyond. First, service sector will recover faster, and air tourism will take the lead. Second, banks, insurance companies and rich-cash position businesses will benefit from interest rates upturn. Besides, we believe banking sector is the best proxy to Vietnam economic resurgence. Third, prices of a few commodities tend to peak in 2H22 which will support for the bottom-line growths of dairy and food producers. Fourth, we expect public investment will accelerate in the coming months regarding the authorities’ recent efforts and the reverse of building material prices. And last, energy infrastructure development will be the long-term investment story to bode well for some power and oil &gas stocks.

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