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Saturday, February 4, 2023

Which sectors are bound for breakthroughs?

By Trieu Duong

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Analysts and investors still expect certain industry groups will outperform the general market in 2023, based on their own stories and the varying degrees of impact from the economic context and the outlook for this year. However, it has been forecast by quite a few organizations that difficulties and challenges will remain.

Stories

The VN-Index wrapped up 2022 disappointingly at 1,007 points, with a drop of nearly 33% against the beginning of the year, making it one of the two markets with the sharpest decline in the world last year. Besides the influence of the monetary policy now tightened again following the prevailing trend, Vietnam’s stock market has been heavily affected by the handling of a series of violations from the corporate bond market to stock market manipulation.

Notably, after the recovery that began in the second half of the fourth quarter and only lasted until early December, the market shows how vulnerable it is. There may still be optimistic forecasts for 2023. However, it is apparent that money is no longer cheap, interest rates are still under upward pressure due to inflation risks, and the market trend for the coming time remains ambiguous.

That said, analysts and investors still expect there will be divergences and certain industry groups will outperform the general market in 2023, based on their own stories and the varying degrees of impact from the economic context and the outlook for this year. However, it has been forecast by quite a few organizations that difficulties and challenges will remain.

The first story is with interest rates further going up and staying at prohibitively high levels, capital-intensive industries like construction and real estate will once again take a hard hit, while those with abundant cash flows and a generally high level of bank deposits, such as insurance, will benefit. In addition, as premiums keep growing and the potentials of the insurance market is faring well, this sector will still hold a quite powerful appeal in the future.

The second story is that with high inflation and recession risks, those industries that are defensive in nature, with leeway to push up the prices they charge consumers without too much negative effect on their product consumption, may catch the attention of investors as well.

In Vietnam, the inflation forecast for 2023 has been adjusted up to 4.5% versus 4% in 2022, showing how intense the pressure of inflation restraint is this year. In line with that, although GDP growth was more than 8% in 2022, the economy is starting to display signs of a slowdown. The Purchasing Managers’ Index (PMI) stood at only 46.4 points in December, whereas it was 47.4 points in November. This is the second time in a row the reading has fallen below the neutral threshold of 50 points, reflecting the continued deterioration of business conditions in the manufacturing sector.

In such an economic context, essential consumer goods such as food, foodstuff, livestock, and pharmaceuticals, or utilities like electricity, water, and healthcare, are expected not to be hit as badly as other industries with hot growth. These sectors may even attract safe-haven cash flows from those investors who seek stability in an economy that may contain more risks. Along with that, food, foodstuff, and livestock companies are likely to also benefit from the reopening of the Chinese economy.

And beneficiaries

Having been aggressively fighting against the pandemic for quite some time, China, in the final weeks of 2022, altered its policy on Covid-19 control, rolling up its sleeves for the reopening of the economy. As predicted by Goldman Sachs, the world’s No. 2 economy is expected to reopen in the early second quarter of 2023, after the peak travel season during the Lunar New Year. With that, those sectors formerly affected by China’s stringent Covid policy will likely become beneficiaries in 2023 and proceed to recover with better growth prospects.

Besides the food and foodstuff industries, whose key export items are bound for China, as mentioned above, one should not fail to mention tourism, which has been ravaged in the past two years by Covid-19. This industry staged a modest recovery in 2022. However, it was still below expectation as China stepped up its Covid-19 combat last year with strict lockdowns. As per statistics, Chinese visitors made up an average of nearly 30% of the total international tourist arrivals to Vietnam from 2015 to 2021. Even in the first two years affected by the pandemic, 2020 and 2021, the percentage was 34% and over 43%, respectively.

Similarly, aviation is expected to recover better in 2023, with a considerable number of flights between Vietnam and China to be resumed, plus new services to many other countries to be launched. Besides, since a sizable portion of their debts is in the greenback, the fact that the exchange rate between the U.S. dollar and the dong tends to stabilize again helps the industry players minimize exchange rate risks.

According to statistics, the seafood industry will be another beneficiary when China reopens its economy, as the Chinese market represented an average of 12.6% of Vietnam’s annual seafood exports in 2016-2021. Tra fish and shrimp, in particular, are the major export items to this market. These segments are likely to further recover as demand after a long period of suppression will probably undergo a significant rebound, as well as to benefit from the recovery of tourism and those free trade agreements (FTAs) that Vietnam has constantly signed over the past time.

While civil construction is distraught by the problems of the real estate sector, infrastructure construction and providers of certain building materials like stone, cement, and steel may recover sooner than expected, thanks to public investment getting a boost in 2023. When the monetary policy needs to be tightened to tackle inflation, the growth momentum will depend on the fiscal policy, particularly the acceleration of infrastructure development projects.

Last but not least, information technology is another industry group blessed with growth opportunities in 2023 thanks to the benefits from the growing trend of digital transformation, which is not only taking place in the private sector but has also been initiated and deployed in the public sector. Notably, what has happened in the past two years of the pandemic further demonstrates how increasingly common the need for digital transformation, digitization, online transactions, and remote working is. As a result, enhanced investment in technology will continue to grow strongly.

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