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AWAITING THE BREAKOUT

Looking ahead to October, the 3Q2014 earnings season is expected to be lively in the last two weeks of the month, acting as a positive catalyst for the market. The banking sector is expected to remain the key growth driver alongside a recovery in the manufacturing and retail sectors, contributing to the VN Index's estimated NPAT growth of ~28% y/y. Growth drivers for the banking sector include (1) a slight increase in NIM in Q3 compared to the previous quarter as asset quality improves, (2) credit costs no longer weigh heavily on profits, and (3) loan growth among banks on the watch list (accounting for ~75% of the sector's total profits) is estimated at 10.5% YTD or up 19.4% YoY. These factors are expected to act as catalysts for the Vietnam’s stock market to break out to new levels as market valuations remain at average trading ranges. In addition, the finalization of regulations to solve problems and promote the development of the stock market, to upgrade the market's status, will be concretized in the draft amended Securities Law, which is expected to be passed in the 8th National Assembly session. If passed, this draft law would mark a turning point for the Vietnam’s stock market, with a potential market upgrade in 2025, as assessed by FTSE and MSCI.
In addition, recent interest rate cuts and supportive economic policies from major central banks create room for the SBV to adopt a dovish monetary policy stance to support the economy. The FED's 50 bps rate cut in September, which marks the beginning of a rate cut cycle from 2020, and its projection of a 150 bps rate cut in the next 15 months, create a favorable investment environment for the stock market in the medium and long term. This is expected to attract foreign capital back to frontier and emerging markets, including Vietnam. In addition, China's recent announcement of new stimulus measures, if successful in reviving growth, could have a positive impact on Vietnam, given the significant trade relationship between the two economies.
On the downside, the escalating conflict in the Middle East poses a near-term risk. The ongoing exchanges between Israel and Iran could, in a worst-case scenario, lead to an Iranian blockade of the Strait of Hormuz, affecting oil and natural gas supplies. A supply shock could send oil and gas prices sharply higher, adding to inflationary pressures and complicating monetary policy for major central banks. While we believe a crisis in the Strait of Hormuz is unlikely, further escalation could trigger significant volatility in global stock markets in the short term, including Vietnam, potentially making the VN Index's path to 1,300 more challenging.
In terms of points, we expect the VN Index to fluctuate in the range of 1,265-1,320 in October. Looking further ahead to the remaining months of Q4 2024, we expect the VN Index could target the 1,334-1,380 range, reflecting a 14%-15% increase in 12-month EPS growth vs. 2023, with an expected P/E ratio of 14.5-15x. The near-term risk to the market remains escalating tensions in the Middle East, which could see the VN Index retest the 13.5x P/E trading range, implying a potential retreat to 1,230 before rebounding