New foreign cash flows for 2011?

09:00 | 31/01/2011
Vietnam was probably one of the worst regional net asset value performers in 2010 when the main VN-Index dropped by 2.2 per cent and the HNX-Index lost over 30 per cent.

Liquidity was unstable, but stayed fairly low most of the time. Inflation and the devaluation of the dong remained key concerns for decisions on asset allocation, especially from foreigners.

Investors are looking to regain their mojo after a tough 2010

Though  foreigners were net buyers during most trading sessions, including those when the market fell significantly, their trading volume was only 5 per cent or less on average, which was not enough to support the uptrend. Since 2008, the role of foreigners in Vietnam’s stock market has decreased.

In 2011, we are cautiously optimistic about new cash flows from foreign investors despite the current short-term macroeconomic risks. The improvement might not happen in the early months of the year, but the opportunities in the second half are obvious.

Will 2011’s macroeconomy be more attractive to foreign investors?

The State Bank’s decision in the middle of November 2010 to tighten the monetary policy both directly and indirectly to control hyperinflation risks and save the dong at the cost of one-off short-term adjustments had a negative impact.

Immediately after the decisions, both inflation and interest rates picked up strongly in November and December 2010, and were much higher than in the same period of 2009.

We are not surprised at such an outcome since we believe that all significant adjustments should be completed before this March. In other words, the recent modifications in the monetary policy serve the medium and long-term outlooks. If everything goes according to plan, and especially gold prices cool to $1,400 per ounce or less we will have seen the worst in 2010 and 2011 will be a good year.

It is more likely that the securities market will hit its peak in the second half of the year rather than at the beginning. The more optimistic scenario will occur if, in the second quarter, investors see indications of an economic recovery.

The 11th National Congress meeting in January is an event that could strongly affect macroeconomic performance and policy-making. For developed markets, elections contain many unknowns with potential opportunities and risks.

The same is true of Vietnam. The equity market will react to the final results of the congress in terms of how much they will affect the scope of monetary policies. Investors could notice some of the following:

  • The strongest policies tend to be more focused on the first years after the election since new personnel will have more time to put their energy into medium and long-term projects.
  • For foreign institutions, the outcome of the election could potentially be a key factor for the portfolio allocation strategies between countries, including Vietnam. Vietnam has, up to now, remained an attractive place for investments.

Will the role of foreign asset management firms improve in 2011?

The market is awaiting the prospect of improved disbursement of funds in 2011 on the local equity market. This will be especially true during the first half of the year. After the doom and gloom of 2010, the role of foreigners can only be enhanced if:

  • The commitments to raise new funds from big names such as Dragon Capital, Mekong Capital or VinaCapital come true and the market receives at least $500 million in new funding.
  • Regional fund managers pay more attention to Vietnam and increase country asset allocation. In December, Goldman Sachs made two sizeable investments in the listed market, which suggests positive outlook for 2011.
  • Bluechip stocks recover their role in leading the market after underperforming in 2010.

The credit growth target of 20-25 per cent in 2011 is very high versus other regional economies. Therefore, funding should not be a critical issue from the perspective of local investors. The question remains, though, as to where those cash flows will be invested.

Impacts of the global financial market on the local equity in 2011

The correlation between VN-Index and Dow Jones has been fairly weak in general. However, during May-June 2010 when the European debt crisis happened, the correlation was very close. For 10 weeks, the VN-Index mirrored the ups and downs of global indices. Therefore, this is a complicating factor for the prospects of Vietnam’s equity market in 2011.

Up to now, there has been no particular serious warning on a potential global scale crisis that could have impacts on Vietnam. But we are still watching a number of events that could potentially impact on the performance of the market in 2011:

  • China increases the base cash rate to control inflation and overheated growth. Significant revision of the interest rates would slow down global economic recovery and could potentially impact on many sectors in our economy, especially exports.
  • The European debt crisis still poses many risks in countries such as Spain, Portugal and Italy.
  • The sustained recovery of the US in 2011 is questionable. Policies from the US government normally have a huge global impact and can affect regional monetary policies. The contraction or expansion of other economies depends strictly on the economic cycle of the US.

Which sectors will perform beyond expectations in 2011?

We have identified three key groups of industries that have the potential to perform beyond expectations in 2011 including:

1. Sectors that have strong fundamentals, especially the profit growth and earnings per share (EPS).  They have strong competitiveness, low gearing, and stable market share and profit margin. This category will be best at attracting foreign investors and satisfying their long-term investment strategies. Some typical sectors include:

  • Consumer retail: food and beverages;
  • Consumer services;
  • Natural rubber, depending on the international rubber price. We are optimistic about profit stability rather than earnings surprises in 2011;
  • Information technology and telecommunication services; and
  • Leading pharmaceutical firms.

2. Some sectors are underpriced because of short-term over-reactions which do not match up with the medium and long-term outlook. The experience of the banking sector in December, 2010 is a typical lesson of how returns were made from sectors that underperformed throughout most of 2010.

The opportunities in this group often appear in the industries that drop in value over a specific period due to short-run factors even though medium and long-term prospects are unaffected. Some of these include:

  • Banking and financial investments: Still underperform compared to other sectors with potential to recover.
  • Securities shares: Normally drop more than the market average in the downturn and recover more strongly during the upswing.

3. Sectors preferred by local and foreign short-traders include:

  • Real estate;
  • Vinaconex and EVN related stocks;
  • Securities firms; and
  • Mining sector.

Overall, from the perspective of monetary policy cycles, we are optimistic about the VN-Index’s outlook in 2011 versus 2010 though opportunities might not be realised in the early months of the year. The drivers of 2010 rely on how inflation and foreign exchange rates are managed. And foreign funds will definitely react to these same factors.

By Nguyen Viet Hung - Director of Research & Investments, SME Securities

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