Jittery start but the year looks good

— 02.02.2021

Vietnam’s stock market has got to a jittery start for 2021, but it’s all due to the relatively fast move up in less than 10 weeks from 900 points to 1200 level. The year 2021 looks very good for the Vietnamese stock market. Economic growth is ready to achieve a record expansion, the listed companies’ earnings growth will surprise on the positive side, and stocks are priced attractively.

The earlier peak of VN-Index at 1200 level was reached in April 2018 based on 2017 full-year earnings. If we look at the next 12 months forward, the companies’ earnings are 40 % higher in total than in the year 2017. If VN Index would trade around 1200 level for the next 12 months, that would mean a 40 % discount by valuation ratios to the level reached in April 2018. Due to the recent sell-off, the market trades now at 1050. Secondly, money market rates have plummeted and that will create upside pressure on Vietnamese stocks. The spread between stocks forward earnings yield (E/P) compared to bond yield has widened now to 5 % (7,2 % – 2,3%). I believe that year 2021 will narrow that gap much smaller by the stock market’s good performance.

At the US markets, it has been the stocks earning yield difference to bond yield that has given the fundamental push for stocks even in the difficult year of 2020. This chart explains a lot of the last year’s good performance of US stock markets and it still gives a hint, that the stock markets good performance has room to continue in 2021, especially, when central banks will try to boost the economic growth by ample money market liquidity thru the year.

Certainly one can argue, that high valuation multiples are a risk, but one must look at the relative return yields to understand what is driving the markets. Once we possibly could get back to much higher bond yields, then certainly the situation would reverse, but at the moment, that’s not the case. In 2021 earnings will grow and stock earnings yield is likely to boost stocks higher, or otherwise, the gap will enlarge.