Vietnam economy is in difficult period
Worries over a weakening economy in April seem to have become pass. May 2020 saw an improvement in some key economic data according to new release from the General Statics Office on 29 May. The industrial production index surged 11.2% month-on-month (mom); although still declining by 3.1% year-on-year (yoy), showing a rebound. On average for the first 5 months, the industrial production index increased by 1% yoy, the lowest level in recent years.
Retail sales also surged 26.9% mom although declined 4.8% yoy, indicating demand has returned. On average for the first 5 months, the retail sales decreased 3.9% yoy. Sales in hospitality, foods and beverage and travel and tourism sectors – the most affected by the pandemic – still declined by 25.8% and 54.1% respectively on yoy basis. Same time last year, the figures for these two sectors were an increase of 9.9% and 12.7%,
The improvement in figures representing both supply and demand indicates that the economy has been experiencing the most difficult period. It should be noted that although the consumer price index declined by 0.03% mom, and by 1.24% year to date, it increased 2.54% yoy and the average for first 5 months increased 4.39% - the highest in the last 3 years. Similarly, inflation increased by 2.54% yoy and the 5 month average surged 2.88% yoy.
Which country would the U.S leave for?
One news that attracted local media’s attention was the relocation of 27 US companies out of China to Indonesia. Since the US-China trade war began US companies relocating out of China is not new. When the pandemic outbroke, this possibility has become more apparent due to worries over the collapse of global supply chains if too much reliance on China. What made the local media and business community surprised, and perhaps disappointing, Vietnam was not the destination of choice.
However, when we look further on this issue, we see that there has been no such news covered by popular international media. This does not imply the news is incorrect, and it might be that it is too soon to be announced. Vietnam appears a favourite among competing destinations for footloose US companies. Among rivaling countries like Indonesia, India and Mexico, the former two are proactively offering attractive packages. Vietnam has a quite significant disadvantage that it has also been considered a destination for Chinese companies wanting to escape from the trade war, which is not appreciated by the US administration, while the advantage of cheap labour has increasingly become irrelevant with the use of technology in the production and manufacturing sector. The World Bank has recently advised Vietnam to change its economic model towards productivity with a focus on creativity and innovation if it wants to be a higher income country in the future.
Another notable point is that although the relocation process has been going on, it is believed that US companies would not move completely out of China but simply deploy a diversification strategy to mitigate both business and political risks. This is because China is a huge market that cannot be ignored. An absence of local production would severely affect consumption. As a result, even if chosen as a destination by US companies and their allies, it would start with small scale and take time. But a slowing down process might be an opportunity for Vietnam to have time to create a more attractive investment environment if they really want to welcome footloose investment.
Emotional trading stock market
The Vietnam stock market index – VNINDEX – has continued its recovery from April to claim a 13% increase in May to 864 points on 29 May whilst the economic and corporate data have not been so impressive. It is notable that the 3 month net selling by foreign investors has slowed down in May. From our observation, foreign investors have sold a net amount of more than $700m year to date – a small number relatively to the size of the market but very meaningful if knowing how hard it was for fund managers to raise a fund even lower than $100m for Vietnam market in the past years.
The foreign outflows reflect asset reallocation on global basis as a normality emerges. Looking at neighbour markets, valuations of Vietnam market are not more attractive with price-to-earnings (PE) 14.28; price to book (PB) 1.92 and price to sales (PS) 1.37 according to Bloomberg on 29 May. These figures are close to the Asia markets on average (MSCI Asia) with PE 14.57; PB 1.55 and PS 1.75. Other nearby markets are fairly competitive with even figures or at least no absolute advantage: Thailand (PE 18.5; PB 1.49; PS 1.18); Malaysia (PE 20.44; PB 1.34; PS 1.76) or Philippines (PE 13.70; PB 1.46; PS 1.63).
We think the surge in stock markets has been mostly supported by surprisingly strong domestic demand. Although we agree stock market has reflected in advance the expectations about the economy, we hold the view expressed in the April issue that the emotional trading should be now replaced by fundamental considerations. In our view, stock market is likely to trade sideways or decline in June to reflect the weakened economic and corporate data, before creating base for the future. Cheap money policy has influenced trading behaviour of domestic investors and this would not last long as the authority sooner or later should ensure loans in the banking sector to go to productive assets and prevent the possibility of asset bubbles. A correction of 5-8% to take the index closer to 800 points would not be surprising.