In recent years, going overseas has been the hottest topic in industrial investment and expanding sales channels, and Vietnam, as our neighbor, is one of the most popular destinations for going overseas globally.

After years of rapid development, Vietnam has become a smaller version of the "world's factory". Especially in recent years, with the international trade environment becoming more complex, Vietnam has become an important haven for the construction of the Asia-Pacific value chain, based on its existing manufacturing industry, combined with demographic dividends and geographical advantages. In this process, Vietnam has not only taken over some of China's industrial transfers but also become an important destination for other countries/regions to go overseas.

Benefiting from the advancement of industrial transfer, Vietnam's economic growth rate has been at the top in Southeast Asia for most of the time in recent years, and the GDP growth rate in 2022 even reached as high as 8.02%. As the fastest-growing economy in Southeast Asia, Vietnam's stock market has also performed very well, with the Ho Chi Minh Index, for example, having a maximum increase of more than 1000% in nearly 20 years.

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However, under the huge increase, the fluctuations in Vietnam's stock market are also very intense. In the past five years, the Ho Chi Minh Index has undergone at least five deep adjustments, showing a trend of ups and downs. At the same time, since 2023, Vietnam's political situation has also been quite turbulent, with frequent changes in the top echelons, and a large number of officials falling under the anti-corruption campaign, which has even affected the normal operation of the government, leading to international concerns about Vietnam's prospects.

Although the international market has some differences in the prospects of Vietnam at present, from the perspective of global asset allocation, to some extent, the global asset shortage has continued for a long time. The bright economic data of Vietnam, the good historical performance of the stock market, the expectation of high-speed economic growth brought by the continuous migration of industries, and the convenience of cross-border capital inflow and outflow, all make Vietnam's stock market become a key asset in the current economic environment that global funds pay attention to.

Although China and Vietnam have a deep historical origin, the culture and customs between the two countries are also quite close, but due to language and information acquisition issues, domestic investors are not familiar with Vietnam and the Vietnamese stock market. This article attempts to answer the following three questions to present a panoramic view of investment in Vietnam for investors.

1. What is the current situation of Vietnam's capital market?

2. Where are the opportunities for investment in Vietnam, and how to price potential risks?

3. Which sectors in Vietnamese investment are worth paying attention to?Introduction to Stock Market Structure

There is a widely circulated theory in the capital market that the stock market is a barometer of the economy. One important reason for this is that the industry structure of the stock market is often closely linked to the national industrial structure. However, the situation may be a bit different for Vietnam.

From 2000 to 2009, the core stock index of Vietnam, the Ho Chi Minh Index, increased by about 3.9 times, while the nominal GDP increased by about 3.5 times during the same period, with the growth rates basically matching. However, from 2010 to the end of 2023, the Ho Chi Minh Index rose by about 120%, while the nominal GDP of Vietnam increased by more than 400% during the same period. The core reason for the gap between the two is the change in the industry structure of the Ho Chi Minh Index.

To understand this phenomenon, we need to first establish a macro understanding of Vietnam's capital market. Looking at the timeline, Vietnam's capital market began in 1996, marked by the establishment of the State Securities Commission of Vietnam, and began to initially establish the basic system of the capital market. In July 2000, the Ho Chi Minh Securities Trading Center (Ho Chi Minh Stock Exchange HOSE) officially started operations; in 2005, the Hanoi Stock Exchange HNX was officially established.

Looking at the specific positioning of the two exchanges, the Ho Chi Minh Exchange is mainly responsible for stock trading, while the Hanoi Exchange undertakes more functions of derivatives and bond trading, and also includes a part of stock trading; moreover, Vietnam also has a stock transfer trading center UPCoM similar to China's New Third Board.

As of May 24, 2024, the Ho Chi Minh Exchange has a total of 410 listed companies with a total market value of about 5139 trillion Vietnamese dong (1.5 trillion yuan), while the Hanoi Exchange has a total of 316 listed companies with a total market value of about 163 trillion Vietnamese dong (50 billion yuan). Due to the significantly lower market value of listed companies on the Hanoi Exchange, our subsequent analysis mainly focuses on the Ho Chi Minh Exchange.

Looking at the change in the number of listed companies in Vietnam, from 2009 to 2011, there was a wave of listings in Vietnam. However, in the following more than ten years, Vietnam has shown a very cautious attitude towards the expansion of listed companies, only promoting more than fifty companies to go public in 2017-2018, and then the total number of listed companies in Vietnam has remained stable, with almost no further growth.However, in terms of industry structure, Vietnam's capital market shows a clear trend: the proportion of the financial industry is increasing.

In 2008, there were 170 listed companies on the Ho Chi Minh Stock Exchange, among which only 3 were financial institutions, and the market value proportion of the financial sector was only 8.6%. But during the listing boom from 2009 to 2011, Vietnam increased the number of listed financial institutions to 14, and the market value proportion of the financial sector also increased to more than 20%.

From 2011 to 2024, the Ho Chi Minh Stock Exchange added about 97 listed companies, among which the net number of listed financial institutions reached 31. With a large number of financial institutions going public, the market value proportion of the financial sector in the Ho Chi Minh Index broke through to more than 40%, and has been the largest weighted industry since 2019.

In addition, real estate has also had its "peak moment" in the Ho Chi Minh Index. With the continuous industrial migration in recent years, especially after Vietnam relaxed restrictions on foreigner's home purchases in 2015, Vietnam's real estate also ushered in a golden development period, and real estate once became the largest weighted industry in the Ho Chi Minh Index in 2018. However, after 2022, under the influence of a series of financial and real estate anti-corruption measures, the market value of the real estate sector shrank significantly, but its weight proportion in the Ho Chi Minh Index at the end of 2023 still reached as high as 15%.

At the end of 2023, the combined weight of Vietnam's financial and real estate industries in the Ho Chi Minh Index was nearly 60%, which has a significant impact on Vietnam's stock market. If we only look at the market value structure, it would give the illusion that Vietnam's economy mainly relies on finance and real estate to drive, but in fact, the proportion of finance and real estate in Vietnam's GDP is not high.

Finance occupies half of the market, but it is actually a helpless move.

The intrinsic logic behind the high total market value proportion of the financial sector in Vietnam's stock market is actually due to Vietnam's long-term basic economic structure, which can be simply summarized as export-oriented and manufacturing processing as the core. Therefore, Vietnam can now be said to have become another "world factory".

However, the process of Vietnam becoming a "world factory" is mainly driven by foreign direct investment, while it has not developed its own national industry. This has led to the fact that among the numerous manufacturing enterprises in Vietnam, foreign capital is the main contributor. According to the statistical data of 2021, the proportion of foreign capital in Vietnam's economy reached as high as 20%.

In terms of the capital market, the proportion of manufacturing industry led by foreign capital in Vietnam's stock market has always been relatively low. In the Ho Chi Minh Index, the median of the long-term total market value proportion of the manufacturing industry is only 9%, and this proportion has been stable and changed very little for a long time. The main reasons for the significant lag of the manufacturing industry's proportion in Vietnam's stock market behind the financial sector are: first, foreign capital has a low willingness to IPO related manufacturing assets in Vietnam's capital market, mainly for the following four reasons:1. Foreign investment in Vietnam primarily values the country's geographical and demographic advantages for manufacturing, rather than its capital market, which is not the main reason attracting foreign capital to invest in Vietnam.

2. Vietnam does not restrict the free flow of cross-border capital; foreign investors tend to prefer financing in more developed and regulated capital markets like Europe, America, and Japan, and then channel the cross-border capital into Vietnam.

3. As an emerging market country, Vietnam's capital market has relatively weak pricing power, and foreign assets may not receive the desired valuation in Vietnam.

4. In the long term, the Vietnamese dong has been depreciating against the US dollar, and exchange rate factors are also one of the main reasons affecting foreign capital's willingness to go public in Vietnam.

Looking at the development of the domestic financial industry in Vietnam's capital market, although Vietnam does not restrict the free flow of cross-border capital, local financial institutions in Vietnam have a clear territorial advantage and policy support in debt financing. Especially as the scale of manufacturing expands, the need for capital financing also grows accordingly. Coupled with Vietnam's gradual improvement in urbanization levels, driven by good demand, the securitization level of Vietnam's financial industry has also been significantly improved.

Reflected in the data, in 2008, the total market value share of the financial industry in the Ho Chi Minh Index was only 9%, which was less than the manufacturing industry at the same time (10%). By 2016, the total market value share of the financial industry had increased to 23%, significantly leading the manufacturing industry at the same time (11%). By 2024, this proportion had climbed to 45%, and it can be said that the financial sector now occupies half of Vietnam's stock market, far outpacing the manufacturing industry.

From 2016 to 2024, a large number of financial institutions went public during this period. In 2016, there were only 18 listed financial institutions in the Ho Chi Minh Index; by 2024, the number of listed financial institutions had risen to 41. Therefore, the significant increase in the total market value share of Vietnam's financial sector in recent years is driven by both rising valuations and得益于 the significant improvement in the securitization level of Vietnam's financial industry.

Vietnam's economic structure, focused on manufacturing, and as another major "world factory" today, it is easy to compare Vietnam with our country's economy and development history. In the view of many, Vietnam is "crossing the river by feeling the stone that is China." Among them, the significant increase in the number of financial institutions listed in recent years (mainly banks) is quite similar in form to several waves of bank listings in our country's capital market history, but the underlying logic is both similar and different.

Looking back at the development process of our country's banking sector, after experiencing three rounds of bank listings from 1999-2003, 2005-2007, and 2015-2016, all large and medium-sized commercial banks, including the five major banks, joint-stock banks, and large city commercial banks, have achieved listing. From a macro perspective, the third round of bank listings coincided with the rapid growth of our country's economy. From the perspective of corporate fundamentals, the first two rounds of bank listings happened after the first round of non-performing asset disposal in our country, allowing bank asset quality to be repaired and achieving "rebirth from the ashes" through shareholding reform. The third round of bank listings solved the long-standing 8-year bank IPO bottleneck problem.

The clustering of Vietnamese financial institutions going public in recent years, from a macro perspective, from 2016 to 2023, without considering the impact of the epidemic, Vietnam's economy has also maintained rapid growth overall, which has some similarities with the macro background of those rounds of bank listings in our country. However, due to Vietnam's indifferent attitude towards its own national industry, the total market value share of Vietnam's financial sector reached an astonishing 45% at the end of 23, while the total market value share of our country's large financial sector (including banks, securities, and insurance) at the same time was only 14%.The differences in the stock market structure between Vietnam and our country essentially reflect the differences in the economic structures of the two countries. Compared to Vietnam, our country's economy is more diverse, especially with a complete set of national industrial systems, which Vietnam currently does not possess. Therefore, compared to Vietnam, our country's stock market industry distribution is more balanced. Even though finance and real estate have played a core role in economic growth over the past decade, the total market value proportion of these two industries is far from being as extreme as in Vietnam.

Looking at Vietnam's current economic structure, its characteristics can be simply summarized as consumption dominance, manufacturing leadership, and a large import and export scale with an export-oriented economy that is heavily reliant on external trade. Among them, Vietnam's import and export trade scale is very large relative to its total GDP, with the proportion of import and export scales to the total GDP reaching as high as 88% and 91% respectively in 2022. From the perspective of industrial structure, the manufacturing industry accounted for 24.8% of Vietnam's GDP in 2022, followed by the wholesale and retail industry at 9.6% and the construction industry at 6.2%. The proportions of the real estate and financial industries are only 3.5% and 4.8% respectively.

It can be seen that the financial sector occupies half of Vietnam's stock market, which is actually a helpless move. After all, a large number of manufacturing assets are held by foreign capital, and foreign capital clearly lacks enthusiasm for IPOs in Vietnam. Therefore, if Vietnam's capital market wants to expand, there are relatively few choices, and it can only start with banks, real estate, and other relatively high-quality assets that are in the hands of Vietnam itself.

The real estate sector, which is the second largest in market value weight in the Ho Chi Minh Index, has experienced two obvious cycles of fluctuation since 2005, and the housing prices in core cities represented by Ho Chi Minh and Hanoi have also fluctuated greatly.

Vietnam's real estate started after the millennium in 2003. The first round of takeoff in a real sense occurred around 2005 when the Vietnamese real estate market entered the first round of rapid price increase. The main driving factors behind it were the continuous improvement of economic prospects and the expansion of domestic credit. However, as housing prices continued to rise, the real estate bubble also continued to accumulate.

To prevent the bubble from bursting and causing a chain reaction, the government consciously reduced credit scale and controlled real estate transactions from 2009. Similar to domestic conditions, Vietnam's real estate market is also highly sensitive to government policies, and under a series of policy suppressions, the transaction volume of Vietnam's real estate market was suppressed.

Around 2011, the level of housing prices in Vietnam had obviously deviated from the local per capita purchasing power and average salary level, and the real estate bubble began to burst at that time, with housing prices falling sharply, even by half. In addition, affected by the downward trend of housing prices and the decline in transaction volume, a large number of loans that had previously flowed into the real estate market also began to default and explode, leading to a large number of bad debts, thus putting greater pressure on the financial system.

The second round of real estate cycle occurred between 2015 and 2022. After the burst of the last round of real estate bubble, Vietnam's real estate has been in a long-term slump. Subsequently, the Vietnamese government adopted a series of active policy measures to stimulate the real estate market, especially the amendment of the "Housing Law" in 2015, which relaxed the conditions for foreigners to buy houses in Vietnam. Since then, stimulated by the improvement of the internal financial environment and the inflow of foreign capital, Vietnam's real estate began to emerge from the trough, and entered a new round of prosperity cycle in 2016.

In this round of real estate cycle, foreign capital played a key role. After the cancellation of foreign capital restrictions in 2015, investors from South Korea and China began to flock into the Vietnamese real estate market, and the Vietnamese real estate market continued to soar. According to statistics from CBRE, a Vietnamese real estate service company, in 2018, foreign buyers accounted for 72% of the customers who bought houses in Vietnam through the company; among foreign buyers, the proportions of China and South Korea were 45% and 22% respectively.After the outbreak of the pandemic in 2020, the Federal Reserve embarked on a monetary easing mode, and in the same year, the Vietnamese government revised the new Investment Law, allowing Vietnamese real estate companies to freely issue bonds and encouraging foreign capital to enter. In the context of a globally ultra-loose monetary policy, a large amount of foreign capital accelerated into the Vietnamese real estate market, driving Vietnamese housing prices to continue to rise. From 2020 to 2022, the average annual increase in housing prices was over 25% for three consecutive years. In the first half of 2022, the housing price increases in Ho Chi Minh City and Hanoi both broke into the top 10 in Asia, with the average housing price in Ho Chi Minh City once reaching $3,300 per square meter, and the year-on-year growth rate at a high base even reached as high as 27%.

However, the狂欢 did not last long, and the high Vietnamese real estate began to collapse at the end of 2022.

After the outbreak of the New Emperor Ming incident, the Vietnamese government began a round of strict supervision and anti-corruption storm in real estate and finance, and many real estate magnates and officials were imprisoned, and the market sentiment fell into a tense and low state. In addition, the global economy fell into a slump after the pandemic, which greatly damaged foreign demand, and as an export-oriented economy, Vietnam was greatly affected.

At the same time, in order to curb inflation, the United States started a rate hike mode, and a large amount of foreign capital began to withdraw from the Vietnamese real estate market. Moreover, due to Vietnam's implementation of a dollar-pegged exchange rate system, it was also forced to follow the rate hike, which was undoubtedly a blow to the Vietnamese real estate. Finally, under the joint action of multiple factors, the Vietnamese real estate market entered a new round of downward adjustment cycle at the end of 2022.

Overall, the fundamental reason for the ups and downs of Vietnamese real estate is quite similar to the logic of the real estate cycle around 2000 in our country, but there are some differences in details.

Firstly, similar to the domestic situation, a good economic environment prospect provides a good development soil for real estate. Since 2005, with the first round of labor-intensive industry transfer, the Vietnamese economy has ushered in a stage of rapid development, and the economic prospect has continued to be good. Especially after 2018, the second round of industry transfer in Vietnam has gradually expanded to technology-intensive industries, and the rapid development of manufacturing industry has made Vietnam one of the fastest-growing emerging economies in Southeast Asia.

Secondly, real estate has become a high-quality currency carrier for foreign capital. After Vietnam relaxed the restrictions on foreign investment in commercial real estate in 2015, foreign capital began to flow into the Vietnamese real estate market; the revision of the Investment Law in 2020, coupled with the globally loose monetary environment, further promoted a large amount of hot money to flow into the Vietnamese real estate, continuously pushing up the bubble of Vietnamese real estate.Unlike the domestic market, 2015 marked the beginning of the current real estate cycle in Vietnam, with housing prices significantly deviating from residents' salaries at that time. The demand for housing among ordinary people was suppressed, leading to a severe dependence on foreign capital in the Vietnamese real estate market. Investors from China, the United States, and South Korea became key forces in the Vietnamese real estate sector. When the Federal Reserve entered the interest rate hike cycle, the continuous outflow of foreign capital, coupled with Vietnam's anti-corruption and rectification efforts in finance and real estate, led to the collapse of the Vietnamese real estate market starting in 2022.

Accompanying two waves of real estate enthusiasm, the number and market value share of listed real estate companies expanded rapidly. Currently, there are 50 real estate companies listed on the Ho Chi Minh Index, compared to only 7 in 2008. During the second wave of real estate enthusiasm, the market value of listed real estate companies expanded rapidly, driving the market value share of the real estate sector in the Ho Chi Minh Index to grow. In 2018, real estate and finance were tied as the largest weighted sectors, reaching 27% at one point in 2019. After 2022, although the real estate sector entered a down cycle, coupled with anti-corruption in finance and real estate, the market value share of the real estate sector has declined, but it is still the second-largest weighted sector in the Ho Chi Minh Index, with a share close to 15%.

Looking to the future, in the short term, the performance of Vietnam's real estate still depends on the support of the Vietnamese government's policies. It is reported that in September 2023, domestic direct investment in Vietnam's real estate sector exceeded $14 billion (a year-on-year increase of 15.5%), accounting for about 70% of the total, showing positive signs of improvement. At the same time, the Vietnam Real Estate Association estimates that from the April-June period to the July-September period in 2024, the real estate market will continue to warm up.

In the long term, Vietnam is still in a period of rapid population growth, with a very young population structure, and is in the middle stage of the demographic dividend; at the same time, Vietnam's current urbanization rate is only about 38%, which is significantly lower than that of its ASEAN neighbors. The current population structure and urbanization rate in Vietnam are only comparable to those in China around 2002, and the proportion of real estate in GDP is only about 4%. Therefore, the rapid population growth, especially the increase in the proportion of the working-age population, and the accelerated rise in the level of urbanization, are still expected to provide a stable foundation for the long-term development of Vietnam's real estate.

As the current major adjustment in real estate approaches its end, structural issues such as irrational price increases in housing caused by excessive foreign intervention, and the oversupply of high-end residential and insufficient low-end residential are expected to be resolved. In the future, with a stable and positive economic outlook, as per capita income continues to rise, the release of housing rigid demand driven by the improvement of urbanization rates is expected to become the main force stimulating the next round of Vietnam's real estate market.

When good expectations are reflected in the real estate sector of Vietnam's stock market, with the support of short-term policy warming and long-term macroeconomic stability, it is expected that the market value of the real estate sector will recover from its low point. Considering the high market value share of real estate in the Ho Chi Minh Index, the stabilization of the real estate sector's market value in the future is still expected to provide stable support for the healthy development of Vietnam's stock market.

Is it worth investing in the future?

Although the current structure of Vietnam's stock market cannot fully reflect Vietnam's economy, the economy is always a barometer of the stock market. The strength of Vietnam's economic growth in the future will directly determine the investment value of Vietnam's stock market.

Investors are optimistic about investment opportunities in Vietnam mainly because they look forward to its stable and optimistic economic prospects in the future. More bluntly, investors are betting on the probability that Vietnam can further take over the industrial transfer in Southeast Asia and evolve into a larger and more advanced "world factory."Looking back at Vietnam's two-phase industrial transfer journey, the first phase began around 2005, primarily taking over labor-intensive industries such as furniture, flooring, photovoltaics, tires, and textile apparel from China. Especially after joining the WTO in 2007, Vietnam extensively signed free trade agreements with major economies. The friendly trade environment, combined with the advantage of labor costs, accelerated the migration of the aforementioned industries to Vietnam.

In 2018, Vietnam welcomed the second round of industrial transfer, marked by the official entry into force of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in Vietnam in 2019. To avoid trade disputes, industries mainly focused on consumer electronics accelerated their shift to Vietnam, and the number of foreign direct investment projects increased again in 2018 and 2019. This round of industrial transfer further strengthened Vietnam's manufacturing capabilities, enriched the scope of manufacturing industries, and also significantly enhanced the value of the manufacturing sector.

Benefiting from the two rounds of industrial transfers, Vietnam's manufacturing industry has expanded rapidly, gradually becoming the most critical driver of economic growth. According to World Bank data, Vietnam's manufacturing value added was $25.2 billion in 2010, rising to $101.2 billion in 2022, with a CAGR of 12.3%. The expansion speed of the manufacturing industry was much higher than the average GDP growth rate (8%) during the same period. In 2022, the share of Vietnam's manufacturing industry in GDP increased to 24.8%, with a significant gap compared to the second and third places of wholesale and retail trade at 9.6% and construction industry at 6.2%.

From the perspective of foreign trade, Vietnam today bears a striking resemblance to China in the early 2000s, characterized by being in the early stages of manufacturing in the international industrial chain, mainly focused on low value-added assembly and processing, and primarily engaging in export-oriented processing trade.

In layman's terms, Vietnam is still a relatively初级 "world factory." It imports intermediate goods from countries like China and South Korea, relies on the advantage of labor costs for processing, and then exports finished products to developed countries in Europe and America through friendly tariff policies and trade agreements, earning low processing fees.

The two rounds of industrial chain transfers have brought a large amount of foreign investment to Vietnam and laid the foundation for its manufacturing industry. Although Vietnam's manufacturing industry has a considerable scale at present, the manufacturing structure, which is mainly focused on primary processing, is clearly not of high value. Moreover, due to Vietnam's weak heavy industry foundation, lack of infrastructure construction, and insufficient support for national industries, it does not yet have a complete manufacturing supply chain.

At the same time, this export-oriented processing trade has directly created Vietnam's typical large import and export, two ends outside the economy model in the foreign trade field. Therefore, the over-reliance on foreign trade has intensified the short-term volatility of Vietnam's economy. In 2023, affected by weak external demand, Vietnam's export growth turned significantly negative, and the trade deficit became apparent, greatly impacting Vietnam's economic performance. Ultimately, with both real estate and trade weakening, Vietnam's GDP growth in 2023 showed a noticeable cooling.If the cost advantage formed by the demographic dividend and the trade policy preferences under trade frictions were the key catalysts for Vietnam to undertake industrial transfer in the past, then manufacturing enterprises cooperating with downstream customers to carry out production matching in Southeast Asia will become an important driving force for Vietnam to continue to undertake industrial transfer at present and in the future.

The most typical example is that the proportion of the electrical and electronic industry in Vietnam's manufacturing exports has continued to increase in recent years, from 29.4% in 2015 to 39.6% in 2021. A major key reason behind this is that consumer electronics giants such as Samsung and Apple have started to layout in Southeast Asia. Driven by production matching, it has triggered a new round of large-scale factory construction by related upstream and downstream suppliers in Vietnam.

Considering that Southeast Asia has already formed a relatively mature industrial cluster, such as electronics in Vietnam and Malaysia; textiles and apparel in Vietnam; automotive in Thailand and Indonesia; machinery in Malaysia; and petrochemical industry in Indonesia, Thailand, and Malaysia. As an important part of Southeast Asia, Vietnam has a demographic dividend advantage, a relatively stable political environment, and an extremely friendly trade environment. In the future, Vietnam's industrial undertaking is expected to further expand to some parts such as automotive, machinery, and semiconductors. Therefore, under the requirements of production matching, Vietnam will still be one of the important destinations for related industries to carry out industrial transfer in the future. The steady expansion of the manufacturing industry will undoubtedly continue to be optimistic about its economic growth prospects.

However, Vietnam also has problems such as lagging infrastructure matching, lack of technical talent, limited corporate governance level, and low social efficiency. Looking back at the development path of China's manufacturing industry after 2000, from undertaking a large amount of low-added-value processing trade after joining the WTO, to the upgrading of the industry under the influence of multiple factors such as government industrial planning and support policies, improvement of population quality, and rapid development of infrastructure matching. With the significant improvement of competitiveness, it has promoted the explosive growth of China's manufacturing industry's own brands and independent intellectual property rights, accelerated domestic substitution, and ultimately developed China into a world-class manufacturing powerhouse.

According to China's historical experience, long-term industrial upgrading cannot be separated from policy support, substantial financial investment, improvement of population quality, the rise of national enterprises, and the continuous improvement of corporate governance level, among many other factors. These factors will also become key variables to consider Vietnam's long-term industrial undertaking ability, especially in the context of the continuous increase in Vietnam's labor costs and the continuous rise in factory construction costs. Whether these problems can be effectively resolved is undoubtedly the direct driving force for Vietnam to upgrade from a "world workshop" to a "world factory."

Returning to stock market investment, the key in the total dimension is still to look at the expectation of Vietnam's future economic growth. In the short term, as the global economy stabilizes, it is expected that Vietnam's economy will bottom out and rebound under the stimulus of export demand. Among them, the United States has a relatively strong demand for export goods from Vietnam, which is one of the strong supports for Vietnam's economic growth in the short term. The logic behind it is:

1. The resilience of this round of U.S. inflation is quite strong. To achieve the policy target of inflation data, it needs cheap goods from Vietnam;

2. With the start of the U.S. manufacturing cycle, the division of labor in the value chain will drive the demand for some processed products from Vietnam.In the medium to long term, following the general trend of supporting local production, Vietnam's industrial acceptance scope and scale are expected to continue to grow. It is highly likely that Vietnam will still possess the ability for long-term rapid growth, and its stable economic growth prospects provide a solid background support for the performance of its capital market.

Strategically, as mentioned earlier, finance and real estate sectors occupy a significant proportion of market value in the Vietnamese stock market, and these two sectors are also the main directions for investing in Vietnam. A previous bearish point was the weakening of real estate and financial sectors in 2022 due to strict regulation and anti-corruption efforts, which brought a significant impact on the Vietnamese stock market.

Currently, after a series of rectifications, the risks in the real estate and financial sectors have been acceleratedly released. Considering that the valuations of both sectors are currently at relatively low levels, as the industries gradually return to normal, a higher valuation safety cushion will undoubtedly increase the investment appeal of the Vietnamese stock market.

At the same time, considering the continuous strengthening of the Federal Reserve's interest rate cut expectations, there is a motivation for cross-border capital to flow back to emerging markets. As Vietnam is an emerging and frontier market with strong growth certainty, it will continue to be an important destination for foreign capital inflow in the future. This expected incremental liquidity is also one of the driving forces for the rise of the Vietnamese stock market.

From the perspective of the stock market structure, under the requirements of local production support, a solid foundation has been provided for the further enrichment of Vietnam's manufacturing industry in the future. With the continuous strengthening of the manufacturing industry and the rise of local enterprises, the Vietnamese stock market is also expected to welcome a batch of local manufacturing enterprises going public in the future, which will help optimize the stock market structure and provide a basis for the stable development of the stock market in the medium and long term.

Who is buying Vietnamese stocks?

As mentioned earlier, foreign capital accounts for a significant proportion in Vietnam's economic structure. So, what is the participation of foreign capital in the Vietnamese stock market?

Public data shows that the upper limit of equity that foreign institutions can invest in and hold in Vietnamese stock exchange companies is divided into several levels such as 100%, 50%, 49%, 30%, and 0%, with the majority of enterprises having a shareholding ratio limit of 49%. Among them, the foreign shareholding limit in the banking sector is generally 30%, and some listed companies in the fields of agriculture, petrochemicals, and infrastructure do not allow foreign shareholding. However, manufacturing companies with strong industry attributes, such as biodegradable plastic producer Anfa (stock code: AAA) and paint manufacturer A Dong Paint Joint (stock code: ADP), have no shareholding restrictions.

In terms of foreign shareholding ratios, according to data released by the Ho Chi Minh Stock Exchange, excluding stocks that foreign capital is not allowed to buy, as of June 3, the foreign shareholding ratio in the Vietnamese stock market is about 17%.

In terms of trading, Guohai Securities previously calculated that before 2020, the transaction volume ratio of foreign capital in the Vietnamese stock market was generally around 25%, and it once exceeded 30%; but it began to decline after 2020, and by mid-2023, it was only slightly more than 10%.However, this year has seen an increase in the activity of foreign capital sentiment trading. According to data released by the Ho Chi Minh Stock Exchange, as of May 2024, the total transaction volume of foreign capital on the Ho Chi Minh Exchange this year accounts for about 18%, while the transaction volume accounts for approximately 14%.

Of course, the overall decline in the proportion of foreign capital transactions after 2020 is not entirely due to the outflow of foreign capital. The most important reason is the explosive influx of retail investors.

According to the investor structure of the Vietnamese stock market, in 2018, there were 2.14 million domestic individual investors in Vietnam, 9,298 institutions, 25,000 overseas individual investors, and 3,319 overseas institutions. By 2022, the number of domestic individual investors in Vietnam had risen sharply to 6.84 million. Of course, during the years from 2018 to 2022, the number of overseas individual investors and overseas institutional investors also increased by about 50% and 30%, respectively, but the growth was significantly less than that of Vietnamese retail investors.

The influx of retail investors has greatly increased the activity of the Vietnamese stock market. Looking at a longer time frame, from 2010 to 2020, the average daily transaction volume of the Ho Chi Minh Index increased from 1.5 trillion Vietnamese dong to 6 trillion Vietnamese dong. In the more than three years from 2021 to 2024, the average daily transaction volume of the Ho Chi Minh Index directly soared from 6 trillion Vietnamese dong to 21 trillion Vietnamese dong.

One of the main reasons for the influx of retail investors is the significant increase in net profits of listed companies due to favorable Vietnamese exports and a booming real estate market between 2020 and 2021. Especially in 2021, according to Mirae Asset's statistical data, the average profit growth rate of Vietnamese listed companies at that time was as high as 38% year-on-year. Of course, the influx of retail investors did bring significant fluctuations to the Vietnamese stock market, but such a large amount of liquidity still provided considerable support to the Vietnamese stock market.

From the perspective of actual transactions, the trading direction of Vietnamese retail investors is basically opposite to that of foreign capital and domestic Vietnamese institutions. For example, when the Ho Chi Minh Index soared by more than 30% in 2021, it was mainly driven by Vietnamese retail investors, while foreign capital and domestic institutions were basically in a net outflow state. In 2022, when the Ho Chi Minh Index plummeted due to the impact of anti-corruption in finance and real estate, foreign capital began to flow in again, but retail investor funds were rapidly flowing out. In 2023, overseas funds continued to flow out under the environment of high US interest rates, but at this time, Vietnamese retail investors played a supporting role and supported a slight increase in the Ho Chi Minh Index.By dissecting the fluctuations of the Ho Chi Minh Index (VNI), it can be observed that Vietnamese investors have primarily relied on valuations to drive stock price movements, rather than earnings, in their overall trading logic over the past period. From 2020 to 2021, global liquidity easing and retail inflows propelled the VNI's valuation (PE) from around 10 times at the bottom to 17 times. In 2022, a series of actions such as the Federal Reserve's interest rate hikes and Vietnam's anti-corruption efforts caused the VNI's PE to fall back to around 10 times. However, starting from 2023, the expectation of Vietnam's economic recovery and the re-entry of retail capital have driven a slow recovery in stock market valuations, which in turn has warmed up the market.

Since 2024, the VNI has accumulated a gain of over 10%, with the price-to-earnings ratio increasing from 12.38 at the beginning of the year to the current 13.79, with the index and valuation gains roughly matching each other.

Of course, in April of this year, frequent changes in Vietnam's political situation led to a sharp decline in the VNI, with the deepest drop exceeding 8%. However, after May, the index has essentially recovered to its previous highs. Currently, the trading logic of the VNI still revolves around the valuation lift driven by the expectation of economic recovery, with the recovery itself depending on the export chain and real estate.

According to data from Vietnam Construction Securities, in the first quarter of 2024, Vietnam's total import and export value reached $178.04 billion, a year-on-year increase of 15.5%. In terms of real estate, since the second half of last year, after hitting a decade-low, Vietnam's real estate sales have begun to improve, with credit growth in the real estate industry outpacing the overall credit growth, indicating that financing for real estate companies is recovering.

Therefore, the dual recovery of real estate and exports, along with expectations of interest rate cuts by the Federal Reserve, are important drivers at the aggregate level supporting the continued rise of Vietnam's stock market in 2024.

Is the Ho Chi Minh Index overvalued or undervalued?

Regarding Vietnam's current valuation situation, the VNI's price-to-earnings ratio is about 14.4 times, which is at the 40th percentile over the past 10 years and the 46th percentile over the past five years. Compared with the price-to-earnings ratios of other emerging market countries, Vietnam's stock market's PE level is currently at a mid-level overall, close to the Shanghai Composite Index, but there is a clear divergence in structure.

The main reason for the low valuation of the Vietnamese stock market at present is the high market value share of the financial sector, due to its currently low valuation level, which has pulled down the overall valuation. According to statistics from CICC, the price-to-earnings ratio of the financial industry in the VNI index is only about 12 times, while the price-to-earnings ratios of materials, consumer goods, industrial, and real estate industries are all in the high valuation range of 40-80 times.Comparing with the current Shanghai Stock Exchange Index, the valuation of the financial sector in the Shanghai Stock Exchange Index is also relatively low, but the distribution of high-valued industries is completely different from that of the Ho Chi Minh Index. Currently, the average price-to-earnings (P/E) ratio of the financial sector in the Shanghai Stock Exchange Index is about 6-7 times, which also lowers the overall P/E ratio of the index. However, the valuation levels of the industrial (14 times), materials (20 times), consumer (25 times), and real estate (9 times) sectors in the current Shanghai Stock Exchange Index are not high compared to the corresponding sectors in the Ho Chi Minh Index. The valuation of the Shanghai Stock Exchange Index mainly relies on the information technology sector (55 times) to drive it.

If we benchmark against the history of the Shanghai Stock Exchange Index, the valuation levels of industries such as industry, materials, and real estate in the Ho Chi Minh Index are very similar to the state of China's A-share market from 2006 to 2008. During that bull market in A-shares from 2006 to 2008, the valuation levels of sectors such as materials, industry, and real estate were also at high levels under the general rise. However, with the end of that bull market, the aforementioned sectors have been digesting valuations for many years thereafter.

Does this mean that the sectors with high valuations in the Ho Chi Minh Index will also be in a long-term state of valuation digestion?

On this point, Vietnam's situation is very different from that of China. The high P/E ratios of sectors such as materials, industry, and real estate in Vietnam are not entirely due to market surges, but are largely caused by a significant decline in the net profit attributable to the parent company (NPATMI) of related companies on the molecular end. Taking the materials sector as an example, the sector fell by 28% from 2022 to 2023, and the net profit attributable to the parent company of the entire sector fell by as much as 48% and 58% in 2022 and 2023Q3 (TTM), respectively. Due to the faster decline on the molecular end, the valuation was passively raised.

After entering 2023, as Vietnam's economy gradually stabilized, these sectors with declining performance also ushered in marginal improvements, and investor sentiment also improved. Taking the materials sector as an example again, the sector's increase in 2023 was as high as 40%, due to the market's early layout for performance reversal, and the financial report data since 2023Q3 has indeed confirmed this reversal expectation.

Based on the current expectations for Vietnam's economic growth, that is, the recovery of exports and the bottoming out of the real estate market have become the overall tone of Vietnam's economy this year. Then, under the high valuation level of the sub-industries themselves, the performance of Vietnam's stock market in the future may shift from valuation-driven to profit-driven. For investors in Vietnam's stock market, grasping the two directions of distress reversal and profit repair in the sub-industries of the real estate chain and export chain will be a good choice.

In CICC's economic analysis of Vietnam in the first quarter of 2024, it believes that Vietnam's industrial activity is expected to show more active performance in the second quarter of this year under the pull of exports. Reflected in the secondary market, investment opportunities in sectors such as consumer goods and manufacturing can be focused on. In addition, measures such as the extension of the value-added tax cut time and the reform of public employee salary in Vietnam this year will also constitute a more obvious benefit to the consumer goods sector.