Inflation's impact on the stock market

DNHN - Inflationary pressures and the trend of central banks across the world raising interest rates to combat inflation have caused most major stock markets to fall in the first six months of the year.

In the middle of the inflationary storm, look for haven stocks.

In periods of high inflation and tight monetary policy, SSI Research believes that "defensive equities" are a viable investment option. Favourite baskets include firms that can recover sales while improving margins, such as SAB, VNM - Vinamilk, QNS, and MSN (MCH). The S& P 500 (US stock market) fell 19.9%, while the Stoxx600 (European stock market) fell 16.2%. MSCI Asia Pacific and MSCI EM both dropped 17.3% and 20%, respectively.

Vietnam's stock market saw its third straight month of the downturn. The VNIndex concluded June's final trading session at 1,197.6 points, down 95.08 points (-7.36%) from the end of May. The index represented the stock market as of August 3. Vietnam has lost almost 17% since the beginning of the year.

According to VCBS, the average trading volume in 2022 will be 18-20% lower than in 2021, with an average of 800-820 million shares traded each session across all three exchanges. The VN-Index might reach 1,580 points at its top in 2022, representing a 6% gain over the peak in 2021.

Inflationary pressures will be more visible in the second half of 2022.

According to the General Statistics Office, the average consumer price index (CPI) climbed by 2.44% in the first six months of 2022, while core inflation increased by 1.25%, both of which were lower than the government's steady goal level of 4%. Along with its outstanding economic development rate, Vietnam is currently one of the world's countries with the lowest inflation rate.

However, inflation began to accelerate in June, with CPI rising by 3.4% year on year, up from 2.86% in May. The latest CPI numbers for July climbed by 0.4% year on year compared to June and by 3.6% compared to the same month last year.

The fundamental cause of the "heat" of inflation spreading to all activities of socioeconomic life worldwide and domestically is high anchor fuel prices. Furthermore, the category of food and food items - which has a considerable weight in the CPI basket - affects inflation.

According to the General Statistics Office, food and food items are always produced and supplied in Vietnam. Because the country's supply of key consumer products, food, and foodstuffs is ample, satisfying the requirements of the population, prices have remained reasonably consistent throughout time.

"However, the fact that the globe is on the verge of a worldwide food catastrophe will put pressure on domestic consumption," said a General Statistics Office spokesperson.

Speaking during the Government's regular news conference in June 2022, Deputy Minister of Planning and Investment Tran Quoc Phuong stated that while inflation in Vietnam is not a major concern, dangers and pressures remain, necessitating extreme caution in pricing management.

The Analysis Department of Vietcombank Securities Company (VCBS) expects that inflationary pressures would persist until the first half of 2023 when the global price of raw materials and fuels will be higher and more reflected in production and product costs. The possibility of a second round of inflationary pressure owing to high fuel prices cannot be ruled out. According to VCBS, inflation in 2022 is anticipated to exceed the National Assembly's 4% objective while remaining moderate in comparison to other nations in the area.

According to SSI Research's July Market Strategy study, inflation pressure will become evident in the second half of the year, and while the average inflation rate in 2022 will still be under control (estimated 3.5%), inflation towards the end of December may go up to 5% over the same time. This increases the likelihood of average inflation exceeding 4%, particularly in the first half of 2023.

Because of geopolitical tensions, the overall economic outlook is likewise less positive. In addition, reciprocal economic sanctions continue to escalate, and the probability of a new epidemic wave outbreak is a big danger that undermines the chance of economic recovery, according to VCBS.

Choosing investment stocks during an inflationary period.

In periods of high inflation and restrictive monetary policy, SI Research believes that "defensive equities" are a good investment. Favourite baskets are firms that can restore sales while improving profitability.

"We think investors may reconsider VNM stock, which has been undervalued for a long time," SSI Research said in its July strategy report, "as we forecast the company will achieve 11% net profit growth in 2023 after 2 years of profit decline (2020-2021), driven by single-digit revenue growth and improved margins as powdered milk prices tend to control down."

Many other securities professionals feel that keeping solid fundamental stocks can help investors navigate the "storm" safely and profitably if they are fortunate enough to acquire fundamental equities at the bottom. As an example, in the second drop, after the market recovered to the 1,300-point threshold when the VnIndex lost hundreds of points, basic stocks like VNM did not change much. As a result, investors holding these basic stocks will not have to fall into a crisis and sell off stocks like speculative stocks and "hot" stocks.

Although the stock market has attempted multiple times to recover from the "storm," many experts feel that the stock market still has powerful shaking rhythms, thus choosing fundamental stocks to "escape the storm" should be one of the current investors' top concerns.

PV