GDP growth is the highest in a decade, why is VN-Index still “circling” the 1,000 point mark?

VN-Index continuously finds the bottom in the context that Vietnam’s economy has been recovering strongly after the pandemic, GDP growth in 2022 reached 8.02%.

After a turbulent year, the stock market (stock market) has started 2023 somewhat more smoothly. VN-Index increased by more than 10% in January, recording the strongest increase in 2 years. However, the joy did not last long, the market quickly corrected after the Tet holiday. VN-Index has dropped more than 6% since the beginning of February and gradually lost its previous gains.

Notably, the stock market continuously adjusted towards the “long-ago” milestone of 1,000 points in the context that Vietnam’s economy has been recovering strongly after the Covid pandemic. GDP growth in 2022 will reach 8.02%, exceeding the set target (6-6.5%). Macro-economy remained stable despite many pressures from inflation and exchange rate. So what created the phase difference between stocks and GDP?

First of all, it must be emphasized that 2022 is the peak year for tightening regulations on the stock market. Measures to correct activities in the stock and bond markets are implemented continuously, synchronously and drastically by the management agency. Many violations were exposed and severely punished with unprecedented penalties.

Basically, the purification is a good medicine for both the stock market as well as the economy in the long run. However, the opposite effects in the short term are inevitable. With the economy, these events often have a certain lag and take time to reflect on the numbers. Meanwhile, with the characteristics that individual investors account for 80% of transactions in the market and decisions are influenced by psychological factors, the stock market reacts very quickly, even before major events occur. .

Pump cycle – suck money

In the past, the stock market had a period of relative volatility that was in sync with GDP growth during the period when the economy was operating normally without major events (crisis, recession,…),. However, the rare “black swan” event in history, the Covid-19 pandemic that broke out in early 2020, completely changed this correlation.

At a time when economic activities were almost frozen due to social distancing in the two years 2020-21, the stock market grew again from the bottom of Covid at the end of March 2020 and climbed to new peaks thanks to the momentum from the Covid-19 pandemic. new wave of investors. The application of electronic identification (eKYC) helps the number of securities accounts to increase rapidly.

Along with that, the interest rate level was lowered to a low level and maintained for a long time to support the economy to overcome the difficult period, which pushed up the cash flow into securities – a possible investment channel. and most profitable at the time. However, since the beginning of 2022 when economic activities are gradually normalized, interest rates have also started to rise again.

Facing exchange rate pressure from the hawkish move of the Fed, the State Bank of Vietnam (SBV) also increased its operating interest rate twice in a row by 1% after many years. Interest rates also quickly returned to pre-epidemic levels and still show no signs of cooling down. A large amount of money has been withdrawn from securities to return to production and business or switch to other safer investment channels such as savings, especially after major events on the stock market.

Despite recent signs of slowing down and cooling down, the interest rate level is forecasted to remain high in the near future, at least until the end of the first half of 2023. This is likely to continue. affecting cash flow into securities and making it difficult for market liquidity to be as abundant as the previous period of cheap money.

Structural difference

Another important factor that causes stocks and GDP to be out of phase comes from the difference in growth drivers. In 2022, GDP increased by 8.02% over the same period last year and was the highest increase in the period 2011-2022. The industry group contributed nearly 42% to the growth, of which the FDI sector accounted for 72% of export value and 50% of industrial output.

However, the proportion of capitalization of these fields on the stock exchange is quite modest, even the number of listed FDI enterprises is only counted on the fingers. In the past, Vietnamese securities used to have 11 listed FDI enterprises, but now there are only 8 because some names have been canceled due to loss of business activities.

The entire stock exchange currently has only 14 enterprises with foreign investors owning 51% or more of charter capital. The market capitalization of this group is about 300,000 billion VND, accounting for less than 8% of the total market capitalization. Meanwhile, sectors such as finance, banking and insurance or real estate account for a large capitalization proportion on the stock market, but only modestly contributed to GDP growth.

Notably, not only the absence of FDI enterprises, the stock market also lacks “blockbusters” on the floor that can create effects like the period 2006-07 or 2017-18. Equitization activities associated with listing, or divestment in SOEs through the bourse, are one of the main reasons leading to this situation.

In recent years, the market has almost no IPO deals that really leave an impression. The number of new investors participating is increasing, but there are no new and quality options, making the transaction almost only focus on a few familiar codes. The growth of the capitalization scale mainly comes from the rotation of the upward speculative cash flow. However, this is difficult to maintain in the long run, especially when the cheap environment is gone.

Stock valuations aren’t really cheap

Foreign cash flow is also a clear difference between the stock market and the economy. The wave of FDI into Vietnam has shown no signs of cooling down. In 2022, it is estimated that FDI projects have disbursed about USD 22.4 billion, up 13.5% over the previous year and a record level in a year. Meanwhile, foreign investors only returned to Vietnam’s stock market from the end of 2022 after a period of continuous net selling.

One of the factors promoting the return of foreign capital came from the rare attractive valuation of Vietnamese stocks at the time of the 2-year bottom in mid-November 2022. However, the strong recovery due to the unprecedented “urgent” net buying of foreign investors made the market valuation less attractive.

After the period of massive buying and selling, the trading intensity of foreign investors has slowed down significantly recently when market valuations have increased, especially after the Q4 profit figures of listed companies are not very likely. mandarin.

Non-financial businesses such as steel, fertilizer, oil and gas, retail, construction, chemicals, tourism… all grew negative and even suffered heavy losses in the last quarter of 2022. The real estate group was also not very positive in the face of difficulties because the two main capital mobilization channels, bank credit and bonds, were tightened.

Meanwhile, the financial group has a certain division. Profits of banking and insurance groups in general still grew but were not synchronized. On the other hand, securities companies faced difficulties with unfavorable market movements in the context of low liquidity. The total profit of the securities industry in the fourth quarter of 2022 was only 1/5 of the peak of the same period last year.

With the high comparison background in the first quarter of last year, the profits of listed companies are forecasted to still grow negatively in the coming time. The high interest rate level maintained for a long time will cause businesses to absorb the blow more clearly. In addition, many large enterprises have also shown signs of running out of breath after going through the peak of the cycle.

Lower expected profit means that the P/E forward of VN-Index will increase and become more expensive. Valuation is not too attractive, making it difficult for the stock market to break through while GDP growth is likely to maintain growth in the near future.

Ha Linh/Market Lifestyle