News and Insights

The manufacturing sector continued to be the main driver of Vietnam's economic growth in May. The Index of Industrial Production (IIP) showed a significant increase of 8.9% year-on-year (YoY) in May and 6.8% YoY for the first five months of 2024. This growth was primarily fueled by robust performance in sectors such as rubber and plastic products (+27.4% YoY), electrical devices (+24%), chemicals (+20.1%), and wooden products (+19.6%). Manufacturers responded to this positive trend by ramping up their hiring, with monthly employment growth in the sector reaching pre-pandemic levels for two consecutive months, hovering around 3.0% to 4.0% YoY. The Manufacturing Purchasing Managers' Index (PMI) stayed in expansionary mode for the second consecutive month, settling at 50.3 points in May, and the output index reached its highest level since September 2022. With key indicators like Foreign Direct Investment (FDI) inflows, imports of raw materials, electricity consumption, and staffing levels pointing towards sustained acceleration in the manufacturing sector, it is anticipated to further strengthen by the end of the year, thereby boosting overall economic growth.

Total investments were largely sustained by foreign investments and improvements in private investments, although public investment disbursements remained sluggish. FDI disbursements rose by 7.8% YoY to USD 8.25 billion in the first five months of 2024, marking the highest level in five years. The country continued to attract foreign investors, with total newly registered FDI and additional FDI soaring by around 33% YoY to approximately USD 10 billion. Private investments showed signs of improvement, with credit growth rates in Hanoi and Ho Chi Minh City reaching 5.1% YTD and 9.8% respectively by the end of May 2024. However, public investment disbursement was lackluster, with state investment growing by only 5.0% YoY and achieving just 27% of this year's plan. Nonetheless, progress is expected in the coming months, as public investment typically accelerates towards year-end.

Inflation remained subdued in May, with headline inflation increasing by a marginal 0.05% month-on-month (MoM) or 4.4% YoY. Food and foodstuff prices rebounded, driven by higher pork prices (+1.94%), while accommodation and construction materials also saw increases due to electricity prices (+2.11%). However, gasoline (-4.72% MoM) and diesel prices (-5.08% MoM) experienced declines, thus dragging the transportation sub-index. Core inflation eased to 2.7% YoY in May, instilling confidence that the government can maintain inflation within the target range of 4.0% to 4.5% YoY for the year.

The Vietnamese Dong faced pressure from a strong US dollar and USD outflows, with imports surging by around 30% YoY in May, leading to heightened demand for the US dollar. To stabilize the foreign exchange (FX) market, the State Bank of Vietnam (SBV) raised its open market operations (OMO) rate to 4.5% and the rate for CB-Bills to 4.2%, while also actively selling USD. Banks responded by hiking deposit rates amidst FX market pressures and increased credit demand as credit growth rates in Hanoi and Ho Chi Minh City accelerated to 5.1% and 9.8% respectively by May 2024. Short-term volatility in the FX market is expected to persist due to the strong US dollar, but a calmer FX market is anticipated by year-end following potential Fed rate adjustments.

The VN-Index rebounded strongly in May, gaining 4.3%, despite facing increased selling pressure from foreign investors. Throughout the month, foreign investors continued to divest from the market, totaling approximately USD 0.6 billion in net sales for May alone, or USD 1.4 billion since the beginning of the year. This aggressive selling may be attributed to profit-taking as the index nears its two-year high and concerns regarding the foreign exchange market. Conversely, retail investors showed resilience by returning to the stock market, seeking opportunities at lower price levels, thereby maintaining the average daily trading value at around USD 0.9 billion.

In May, most sectors recorded positive returns, with the exception of the financial sector, which posted a slight decline of 0.3%. The energy sector notably performed the best, surging by 14.2%, driven by the oil and gas stocks. The positive performance of oil and gas stocks was fueled by two main factors: the anticipation of Block B reaching Final Investment Decision (FID) in 2024, leading to increased stock prices of upstream enterprises (PVS, PVD, PVB), and the introduction of a draft for the new Petroleum Business Decree, which proposes changes favorable to the business activities of downstream petroleum distribution enterprises (PLX, OIL).

The VN-Index is currently trading with a trailing P/E ratio of 15.8x, nearing its average P/E ratio over the past three years, which stands at 16.3x. As a result, there could be an increase in selling pressure in the near term, particularly given the ongoing trend of divestment by foreign investors. Additionally, investors may pay close attention to preliminary second-quarter earnings results from listed companies and economic data for the same period by the end of June. We maintain a positive outlook on Vietnam's stock market for the remainder of the year, supported by strong economic activity and a rapid growth in earnings.