I was invited to a business lunch recently in Ho Chi Minh City, the entrepreneurial capital of Vietnam, We were brought to a French restaurant tucked down a narrow alleyway, a bit like St. Christopher’s Place in London.
It was all very pleasant and upmarket, and my stockbroker friends had a fine meal. But I couldn’t stop noticing the tell-tale signs. The restaurant had been converted from an old opium den!
The layout was unchanged – high ceilings and thick walls, which would in the past have provided patrons with shelter from the sun and privacy to smoke opium. Now it was filled with laughing foreigners, smartly dressed locals and a service that you would expect from any restaurant in the Square Mile.
I love the fact that this sordid old place is being used for something positive. The opium den is now a meeting place for smart entrepreneurs that are working hard on building this new Vietnam.
Vietnam has started 2014 with a bang. So far this year the Ho Chi Minh Stock Index has gained 9.5% in dollar terms, making it the best performing stock market in the world. What is thrilling is that the current index level is just a tad below the May 2010 level, suggesting that the market is on the cusp of a major breakout.
You would expect that Asian funds are cheering this news, but I doubt it. The reality is that benchmarking long-only funds are mandated to fill their portfolios with the bigger markets, particularly Chinese stocks which are treading water. In truth, Vietnam is a ‘tracking error’ which will only be taken seriously when the stock market is bigger and more liquid, ie after strong gains.
Here’s our take on what’s going on in this scorching Asian frontier market.
Three reasons why Vietnam is ahead
The MSCI Frontier Index (MSCI) started the year on a strong footing with a 6.5% gain, something we had flagged for the end of last year. Within that group, Vietnam is the clear leader for three reasons:
Firstly, positioning. There are a number of new funds being launched, triggering a need (and anticipation) to buy stocks from the market over the next few months. I think the interest in Vietnam and other frontier market is the result of China, the biggest economy in Asia. China is going through a period of trying to reduce its debt levels and make the economy more consumer and domestic oriented. China 2.0 will need time, which means that money needs to be deployed elsewhere. Flow to frontier markets has exceeded $100m, according to BoA Merrill Lynch. Some pan-Asian brokers have also announced tie-ups with Vietnamese brokers, meaning that it will be easier for large institutions to trade them seamlessly.
Secondly, reforms, which tend to be rewarded by the stock market. Earlier this year, the government announced Decree 01/2014/ND-CP on lifting foreign ownership in Vietnamese credit institutions. Effective from 20 February, a foreign strategic partner can own 20% in domestic banks, up from 15% in 2007. The market believes this is the first step in lifting the foreign ownership level to 60%, which the prime minister alluded to when he visited the US a couple of months ago. And there are also hopes that the Vietnam Asset Management Company, formed in 2013, will step up its strategy of acquiring non-performing loans from the banks.
Tied into the prospects of reforms are a number of push and pull factors making Vietnam a ‘hot place’. For instance, cheap labour and land are attractive features for industrial companies from Japan, Korea and Taiwan. This is further enhanced by push factors like territorial disputes in South China, introduction of the Asean free trade area by end of 2015 and the possibilities of concluding the Trans Pacific Partnership (TPP) trade agreement later this year.
Thirdly, alternatives are less attractive. Traditionally, the Vietnamese are known to consider three investment alternatives: gold, property and stocks. The first candidate is facing some serious headwinds and the property market is also less hot. The exception is properties priced below $50,000, which are seen as affordable. Vietnam has a sizeable diaspora of workers and relatives – a legacy from its French colonial past and the Vietnam War. Many South Vietnamese and subsequent ‘Boat People’ are living in the West. There is a sizeable pool of remittance that can be deployed. According to Dragon Capital, as of end December 2013, the VNI Index 500 was trading at a price to earnings of 10.7x FY14, EPS growth of 10.2%, net debt-to-equity ratio of 0.2x and dividend yield of 2.9%. The economy grew by 5.2% and 5.4% in 2012 and 2013 respectively. It is expected to jump to 6% in 2014.
How to play this
Vietnam is now what traders would refer to as a ‘momentum trade’, where further gains will depend on the ability to stay above the May 2010 high.
The Chinese Lunar New Year (known as ‘Tet’ in Vietnam) will be a major test. It often marks a pause as many punters save cash for gifts and trips back to their families. This year, Tet falls on 31 January. If that event is convincingly cleared, I suspect that Vietnam could be ready for a bumper year.
How to play this?
There are a number of closed-end funds available with various investment strategies, minimum investment requirements and other idiosyncrasies (like lacking UK investor protection as they are domiciled overseas). With these, the beauty is that they trade at discount to net asset value (NAV) which tends to narrow when the market is hot. In theory, Asian funds could use this as a way to get exposure without needing to allocate too many resources into analysing individual companies. In practice that is hard as many funds disallow investments in other funds, presumably on the ground that the fund managers are supposed to do the legwork. Hedge funds tend to be more relaxed, which is the main reason (together with the ability to short) why they lack excuses if their performances are bad in contrast to their long-only peers…
There are also exchange-traded funds (ETFs) which offer directional trade. The major drawback is that they trade at a premium to NAV, for instance, 10.6% for the Market Vectors Vietnam ETF (VNM US) and 2.6% for DB X-Trackers FTSE Vietnam (XVTD LN). Another snag is that most of them cannot replicate the market index due to liquidity and accessibility concerns. They resolve this by including stocks elsewhere with Vietnam exposure to mixed success.
Finally, but not least, second derivatives meaning stocks in neighbouring countries with operations and/or assets in the country. I expect quite a few heads of research will be fielded questions in this group, resulting in a hunt to unearth potential long-term beneficiaries.