New Year’s Stock Market: What To Expect?
Most organizations have given quite positive forecasts about the stock market in 2022, pinning high hopes on the VN-Index reaching new heights in the range of 1,700-1,800. The confidence is based on the expectation that corporate profit will grow in line with the economic recovery which renders the valuation of the domestic market more captivating than that of other countries in the region.
Amore expansionary fiscal policy with a boost in public investment, tax and fee exemption and reduction, whereas the monetary policy remains easy, is considered the main support for the stock market. Though some major central banks in the world have begun to tighten their monetary policies in response to inflationary threat, the opposite is also true with certain others having suddenly relaxed their policies again, exemplified by the People’s Bank of China (PBoC), which has recently made consecutive cuts in its reserve requirement ratio and interest rates.
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In Vietnam, despite the mounting pressure, inflation is believed to remain under control. That means even when interest rates are unlikely to plunge deeper, they will not suddenly shoot up either, but are more inclined to remain stable. In that case, the meagre interest rates on bank savings will once again stimulate idle cash flows to shift into the stock market, an inevitable trend experienced by developed economies.
Based on the forecasts of the business community for profit growth in 2022, organizations predict the price-to-earnings (P/E) ratio of the VN-Index will drop to around 13.5, from the current level of 17. As the most common interest rate for 12-month deposits at banks is now 5-6% per annum, the P/E of the savings channel ranges from 16.7 to 20, showing the prospect of the stock market this year is still much brighter than that of bank deposits.
Besides, interest rates remaining stable at a low level will continue to help enterprises cut financial costs, and stimulate the expansion of investment, production and business activities in anticipation of the recovery of economic growth. This forecast opens up more room for profit growth in the coming time, thereby providing greater support for corporate stock prices.
It is worth noting that the FTSE’s annual market classification review will come in September. At the time, Vietnam’s stock market may be upgraded to the emerging market status if its reforms can meet all the criteria for such an upgrade and help improve market transparency and efficiency. As a result, foreign capital inflows may soon come back, especially given the new stock trading system developed by the Korean partner scheduled to officially come on stream in the first half of 2022 to partly help solve the problem concerning the ratio of margin and cash trading.
It is worth noting that the FTSE’s annual market classification review will come in September. At the time, Vietnam’s stock market may be upgraded to the emerging market status if its reforms can meet all the criteria for such an upgrade and help improve market transparency and efficiency. As a result, foreign capital inflows may soon come back, especially given the new stock trading system developed by the Korean partner scheduled to officially come on stream in the first half of 2022 to partly help solve the problem concerning the ratio of margin and cash trading.
Risks to watch out for
Furthermore, concerns still abound in market risks. The biggest of them remains a possible out-of-control pandemic outbreak, plus the emergence of new Covid-19 variants. However, experience of the past two years suggests that the market usually comes under pressure in the early stage of an outbreak only; then it continues to recover and grow strongly as idle cash flows once again look for opportunities in this investment channel.
As the vaccine coverage has reached the target—several cities and provinces have even implemented the booster dose—it is expected that herd immunity will soon be achieved in 2022. Meanwhile, the Government can hardly implement extensive social distancing anymore, considering how profoundly such a policy impacts the economy. Notably, a well-controlled pandemic does not equal a sure upturn on the stock market, because it is possible that the expenditure businesses have made on swing trading for more than a year now will gradually be withdrawn to resume their role of facilitating investment, production and business activities.
Moreover, last year witnessed a massive cash flow channeled into the stock market from the real estate sector, as the impact of the pandemic and social distancing subjected realty investment to multiple limitations and poor liquidity. In 2022, however, this trend may reverse, with investors gradually taking profit in securities and returning to real estate in response to the growth potentials of this market.
Another risk to be cautious of is the possibility of corrections in international stock markets, especially the United States as the Federal Reserve (Fed) is now seeking to raise interest rates. Stock markets of emerging and developing economies have never been able to evade the direct influence from the developed ones, especially with the added risks of Taper Tantrum and the further rise of the greenback.
Geopolitical risks are also a factor of particular concern when it comes to recent hot spots including escalating tensions between China and the U.S. over Taiwan, and between Russia and the West over the Ukrainian conflict, etc.
Divergence
Given the above factors, some believe Vietnam’s stock market is likely to remain optimistic in the early months of this year. From the middle of the year onward, however, it will be under pressure of corrections, particularly when the Fed starts to hike interest rates, and when the pandemic will no longer be the major concern, stimulating the corporate circle to boldly step up their investment, production and business activities.
Despite the general market’s movements, there will still be divergence between industry groups as far as the cash flows are concerned. The groups holding high expectations are those benefiting from the growth cycle and the policy on comprehensively reopening the economy— such as aviation, tourism, services and retail— when consumer demand improves spurred by optimism about the economy and stimulus packages. Commodity and food stocks are also worth noting, as the recovery of the global economy will push up commodity prices, along with the risk of a food crisis which is becoming more and more apparent.
Stocks of real estate—both commercial and industrial—have seen impressive growth in recent months, a trend which is likely to continue in the early months of this year. In this regard, infrastructure development projects will be the center of attention in 2022 in an attempt to create a spillover for economic growth. This coupled with the constantly adequate inflows of foreign investment will help push up housing prices in various segments. In addition to industrial park developers, those developing seaport and energy infrastructure are also in the spotlight this year.
Last but not least, stocks of banks and securities companies will wind up the list. The group of securities firms always benefits the most when the stock market has been bullish with its liquidity growing to new heights, strong cash inflows and the continuous surge in the number of new investors over the past six months. On the contrary, however, the groups of bank securities have undergone many corrections. It is therefore expected to recover soon as from the beginning of the year, given the fact that this is still one of the few industries which always maintain a positive profit in any economic situation.