The positive recovery of the Vietnamese economy so soon after the Covid-19 pandemic indicates that the stock market decline in Vietnam was caused by negative external factors. The global stock market has plunged recently, mainly because the US Federal Reserve (FED) raised the interest rate by half a percentage point in March, the first increase since December 2018. The points drop in the markets markets around the world is very likely to continue, however, the FED can be expected to reverse its interest rate hike plan if the US stock market continues to decline.
In addition to problems in global stock markets, investors in Vietnam have been selling stocks linked to security deposits, putting enormous pressure on the Vietnamese stock market in recent weeks. The number of retail investors in the stock market has increased by 70% in the past twelve months, most of whom tend to be interested in opening margin deposit accounts in hopes of making quick profits only. When the decline in the US stock market and other stock markets around the world activated margin call orders, many of these new investors exited their long position. We estimate that the balance of margin deposits with securities brokerage firms has fallen by around 25%, compared to the high level of a few weeks ago.
Along with the situation where investors had to sell their shares due to margin call orders, another factor triggered the selling of shares. Some listed companies took out loans for the development of real estate projects or other similar projects, but they broke their commitment and spent the loans in the stock market. We understand that the government is trying to prevent the misuse of this source of capital, and this is another reason why investors have been forced to sell their shares.
Safe havens for investors
It is evident that the VN index is in freefall despite the strong growth of the Vietnamese economy and the many fundamental strengths in the stock market. These strengths include an expected P/E ratio of 11.4x, compared to the consensus expectation of 21% earnings growth on HoSE stocks this year, and a valuation discount of around 30% compared to other countries in the same region. In the market, however, there is a clear division in investment efficiency between different industries, due to differences in basic factors. This creates opportunities for investors to find safe havens in defensive stocks. In fact, three leading sectors are safe havens, namely utilities, consumer discretionary and information technology.
Stock prices in these sectors have consistently been on the rise, supported by strong first quarter results. For example, earnings and stock prices in the utilities sector are supported by growth in power generation which has doubled this year. Consumer discretionary stocks are benefiting from the ambitious expansion plans of some key companies. While stock prices in the information technology sector are benefiting from a surge in sales of software outsourcing services.
In addition to the three sectors mentioned above, it should also be noted that the profits of materials companies have jumped almost 60% compared to the same period last year. This was pushed by fertilizer companies making about eight times more profit than before. Similarly, profits earned by consumer staples companies and financial companies rose by around 45% and 30%, respectively.