Strategy Note /

Vietnam investment strategy – August 2020: Prudence with macroeconomic outlook

  • With the second wave of the pandemic, recovery will take longer than we expected due to weaker domestic consumption

  • The stock market was down, but investors did not panic as they did in March during the first wave

  • Building materials will be clear winners on the back of rising public investment

Lam Nguyen
Lam Nguyen

Banking, Market Strat

Vu Tran
Hoang Nguyen
Tu Vu
Rong Viet
6 August 2020
Published byRong Viet

With the second wave of the coronavirus pandemic, economic recovery will take longer than we expected because of weaker domestic consumption. The second wave has negatively impacted consumer buying power and mobility. Since Vietnam is heavily dependent on exports, a global recession will result in decreasing manufacturing orders, dragging down production activities. However, there are supportive elements for the economy, especially the government’s support towards power infrastructure construction activities through public investment. 

Investors react more calm

The stock market was down, but investors did not panic as they did in March during the first wave. The VNIndex only decreased by 9% (from the start of the second wave to the latest lowest level), compared to the 11.5% drop during the first wave. When the second wave started, macro indicators were also not optimistic (July), with more cautious cash flow into the market. Average liquidity from the start of the second wave until now was only VND4,200bn, fading out in the past few sessions to VND3,000bn, lower than the VND4,000bn-VND5,000bn in the recovery period in April and May. We do not change our view on the market at this time. In the previous wave, after 16 to 18 days since the start, containment measures were basically effective, and the stock market bottomed out around the same time. Therefore, with the government’s concerted effort to contain the second wave, we believe that the market can “bottom” around 4-8 August. However, we think that the VN-Index could drop to 720 points in the worst-case scenario if the government enforces social-distancing policies in Ha Noi and Ho Chi Minh city.  

Cautious as macroeconomic indicators were not positive 

Despite an abundance of cash and liquidity in the context of low deposit rates, the stock market did not fall significantly enough. Contrary to expectations that Vietnam’s economy will recover strongly in the H2 20, macroeconomic data in July was not positive. The second outbreak, therefore, has raised concerns about the prospect of a recovery in the second half of the year. 

Meanwhile, the government has been focusing on public investment (key GDP’s growth driver in 2020), with 7M2020 public investment up by 27.2% yoy to VND203tn, and equivalent to 42.7% of FY 20 plan. The ministry of transportation has also completed 41.6% of the full year plan, rising by 91.7% yoy. For the rest of the year, the ministry of transportation will focus on highway construction to achieve 85% of the 2020 target by November. Three main expressway projects that have been transformed from PPP investment to public investment – Mai Son-QL45, Phan Thiet-Dau Giay and Vinh Hao-Phan Thiet – are expected to be promoted together with eight remaining PPP projects in the North-South expressway. For public investment projects, contractor selection and commencement will start in August while PPP projects are likely to start next year. 

Building materials (rock construction industry, metal or asphalt) will be clear winners on the back of rising public investment. Moreover, the names in the industry such as PLC and DHA have all posted good results in Q2 20. Elsewhere, livestock companies (DBC) will enjoy the benefit of high domestic pork prices. 

Some of our favourite stocks this month include: VPB, ACB, MBB, FPT, HDB, REE, PC1, DRC, DIG, NT2.