“The VND remains strong, and HSBC expects it to remain on steady ground and the USD - VND rate to remain around 23,100”
A report from HSBC Vietnam
Vietnam has emerged from the pandemic with relatively few scars. This is largely due to: (1) taking early action to contain the virus; (2) early resumption of work; (3) continuous FDI inflows; (4) manufacturing growth; and (5) booming exports.
Real GDP Report grew 2.9% year-on-year in 2020, one of the best worldwide.
Despite lingering headwinds from COVID-19, HSBC economists remain optimistic about Vietnam’s outlook. It is set to benefit from numerous FTA’s, consistent FDI inflows and a tech-led recovery – leading to GDP growth of 7.0% in 2021. Meanwhile, inflation pressure should continue to moderate, with headline inflation averaging 3.0% in 2021, comfortably below the State Bank of Vietnam’s (SBV) 4% inflation ceiling.
The VND remains strong, and HSBC expects it to remain on steady ground with HSBC FX strategists Paul Mackel and Madan Reddy expecting the USD-VND to trade around 23,100 levels.
There are two reasons to believe that the FX policy changes will be slow and steady: (1) the authorities still do not consider the current level of FX reserves as adequate, and (2) Vietnam still heavily relies on foreign invested enterprises (FIE’s) earnings. In their view, abrupt policy moves to align the VND with the US Treasury’s view are less likely.
Vietnam’s VN index has rebounded since the start of the year and is up 7.5% year-to-date. It has outperformed relative to emerging markets, which have risen 6.0% year-to-date and global frontier markets, which are up 0.7% year-to-date.
On the valuation front, the market looks reasonable with 12-month trailing Price Earnings (PE’s) trading at 17.2x compared to its 5-year average of 16.0x. 12-month trailing Price-To-Book (PB), on the other hand, is trading at 2.4x, an 8% premium to its 5-year average. Most of the countries in the Southeast Asian region will continue to trade at a higher valuation premium than their short and long run average.
However, Vietnam still has scope for a further uptrend as the market trades at very close to its 5-year average. On the earnings front, Vietnam Earning Per Share (EPS) growth declined 0.6% in 2020, still better than many markets in Asia. It is expected to bounce back sharply, with estimated EPS growth of 21.4% and 23.5% in 2021 and 2022, respectively.
HSBC thinks Vietnam’s resilience during the pandemic has increased investor confidence in the equity market. Return On Equity (ROE) has been on the rise for the last couple of years. 12-month trailing ROE has increased to 13%, after a slight fall in 2020, but is way above the 2016 lows. PB valuations have also risen sharply since last year but remain well below the April 2018 peak, leaving room for further increases.
Overall, HSBC finds that balance sheets are strong. Leverage levels in Vietnam (ex-financials) look very comfortable, with net debt to equity at 18%. Debt levels have also been falling over the past five years, reducing risks. Leverage levels are lower than in other ASEAN markets, with the exception of Indonesia. Debt servicing capacity also looks comfortable, with the EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) to interest expense ratio at 10.1x,
Sectors Driving Growth
Since the beginning of 2021, most sectors have seen positive returns, particularly materials, telecom, energy and financials. Healthcare is the only sector that has declined year-to-date (down 4.3%).
Net interest margins have risen over the past year and loan to deposit ratios remain at reasonable levels. Non-performing loans (NPL’s), which were a major issue in the past, are under control and have been gradually declining over the years. Having said that, financials is going to drive the earnings, given the sector’s high contribution to earnings growth.
Earnings in 2020 declined the most in telecom, energy and industrials, partially offset by increases in real estate, IT and healthcare. Energy and consumer discretionary are expected to bounce back in 2021. The energy sector will be supported by government plans to increase infrastructure spending, while consumer discretionary spending should get back to normal after the pandemic.