VNDirect expects the VN-Index head to 1,300-1,350 level in the 2H23. Photo: Quoc Tuan

Loosening the financial conditions

Whether inflation is reduced to more tolerable levels in 2023 will determine whether central banks loosen financial conditions. The FED fund rate is projected to rise to 5% within the first half of 23 and undergo a first gradual 25bp decrease in the first quarter of 24 despite ongoing discussions over when rates will peak.

According to the most recent hike cycle, the first Fed cut occurred almost seven months later.

Vietnam economy outlook  

Vietnam will have to deal with limit  ed export growth, high interest rates, a worldwide inflation rate that is dropping but still uncomfortably high, tight liquidity, and maybe increased debt distress in the residential real estate sector in 2023. There won't be many macro tailwinds, perhaps in the shape of a strong energy transition and infrastructure growth resulting from public investment.

The GDP growth rate predicted by VNDirect for 2023F is 6.7% yoy, somewhat better than the 6.5% government objective but lower than 2022F's 7.9% growth rate. It believes that the openness of China and increasing FDI rivalry among regional rivals are expected to be influencing factors for Vietnam's growth prospects.

Pressure on interest rates and currencies

The USD is anticipated to remain strong during 2023. But a combination of bettering FX reserves and the Fed adopting a less hawkish position around mid-2023 would put an end to the abrupt decline in VND and could lead to a reversal of roughly 1-2% appreciation versus the US dollar by the end of 2023.

Early in December 2022, the VN-Index tended to rebound.

Vietnam's foreign exchange reserve is currently around US$89 billion, but according to VNDirect, it will increase to US$102 billion by the end of 2023. A growing likelihood of a tightening liquidity backstop globally gives the State Bank of Vietnam flexibility to maintain current policy rates. Deposit rates will thereafter remain unchanged in 1H23 and gradually decline starting in 3Q23.

Next year with two halves

For the early 2023, VNDirect believes 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. “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”, said VNDirect.

Trough valuations

VN-index could succumbe to market negative sentiment in 2022, not its fundamentals. VNDirect expects 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 Vietnam stock 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.