As 2018 was a disappointing year for the VN-Index (YTD VN-Index reduced by 9.4%), it seems that Vietnam fundamentals and stock market performance has experienced a divergence, due to a number of reasons mentioned above. With a protracted US-China trade war of attrition as the base case for 2019, forward-facing stock market valuation has been lowered to reflect weaker sentiment from local investors. Looking forward, the market needs a firecracker of a catalyst to boost investor confidence amid global uncertainties.  

Privatization remains a strong catalyst for the market in the next 2 years, as it benefits not only the macro side (capital inflow leading to strong currency) but also the stock market as well as corporate governance improvement. If privatization could be implemented in the right way, then an upgrade to emerging market status could be another catalyst for growth. However, words need to translate into action, else these growth catalysts may not be sparked into action for the near term.

Stock market reform, i.e. implementing stock market reform plan by 2020, revising the Securities Laws, or slashing the commission’s floor level, launching new product such as covered warrants, et`c. could attract more investors attention and improve liquidity.

Valuation could become more attractive over time, especially as the market overreacts to negative news. When that trough in negative sentiment touches bottom, it could then be the right timing to buy, as Vietnam underlying growth fundamentals are expected to be resilient and two important catalysts remain intact, with an impact for years to come. 2019 earnings growth is forecasted to be 18.3% YoY, lower than 2018 but still at a healthy level in our opinion. The stock market is trading at 2018 and 2019 PERs of 15.2x and 12.8x based on the market prices from 20th Dec 2018. Given a positive earnings Outlook in 2019 amid weaker sentiment, we lower our market PER expectation, and forecast that the stock market might edge up around 10%-15% in 2019 as compared with 2018 levels as our base case assumption.  This translates to a market PER target of 13x, which could justify higher uncertainties amid a rising interest rate environment.  Please note that during 2013-2016, Vietnam market PER always traded under a 14x level. 

Most sectors that may have experienced high earnings growth in 2018 including property, banking, consumer discretionary, and industrials are expected to experience slower growth next year. However, these sectors continue to lead the market/economy in terms of its profit growth rate.  Although the market still favors growth stocks, when gazing into a year with more uncertainties, we ultimately believe stocks with high dividend will be also favored.  Some specific sectors might also attract attention, such as potential beneficiaries from US-China trade war (Industrial parks), e-commerce (thanks to a currently low penetration rate in Vietnam), retail or consumer discretionary.