The rally in Vietnamese stocks still has a long way to go, with the consensus expecting the VN-Index to increase by over 20 per cent this year, Michael Kokalari, chief economist at investment fund VinaCapital, has said in a recent report.

The index surged by 10.3 per cent in January, driven by an easing of concerns about the credit crunch and corporate bond market, which were the main reasons for a 33 per cent fall in 2022, and by a resurgence in foreign buying.

The 10 per cent increase outpaced the 4 per cent average in Asian emerging market peers (Thailand, Indonesia, Malaysia and Philippines) though admittedly the low-base effect was in play since the decline in Viet Nam’s stock market last year was much greater.

The biggest contributor to the increase was an average 15 per cent rise in the prices of bank shares, which accounted for nearly half of the index’s gains.

It was due in part to an easing of concerns that corporations (especially property developers) will face challenges rolling over or redeeming US$13 billion worth of maturing bonds this year, which could have created significant issues for banks, which hold nearly $10 billion worth of bonds.

“Notwithstanding all of the above, we also see some evidence that the rebound in bank share prices was also driven by a rotation out of the best performing stocks in 2022 and into the worst performing stocks,” Kokalari said.

Over half the stocks that drove the increase in January were among the 20 that pulled the index down the most last year, and those 20 contributed a third of the market’s increase, he said.

Foreign inflows rebounded in November-January, partly because the market’s valuation had reached its lowest level in nearly ten years, with a P/E ratio of below 10x. Foreign investors bought $1.3 billion of stocks in November-January, including $179 million in January alone.

The stock that foreigners bought the most in January was steel producer Hoa Phat Group (HPG). Foreigners are hopeful that China’s reopening would also lead to a revival of construction in that country and that Viet Nam’s Government would follow through on its ambitious plans to increase infrastructure spending by 50 per cent this year (to $30 billion), Kokalari said.

Finally, a modest decline in the value of the US dollar/DXY Index helped boost Asia emerging stock markets in January, another factor that helped drive the VN-Index higher, he added.

“We remain cautiously optimistic that the Vietnamese market will move higher in 2023, even after the strong start.

“We also believe that while many of the stocks that drove the market higher in January will be decent performers this year, much of this year’s performance will come from stocks that did not have a very strong January, and that select mid- and small-cap stocks will be very attractive the next 12 months.”

He said stock selection will continue to be important this year because 2023 will not be a simple beta rally. Active managers like VinaCapital have an opportunity to outperform the VNI and deliver a better risk-adjusted return, he said. — VNS