Vietnam’s stock market bull run

Investors ignored Vietnam for most of last year. This year they’ll find it much harder to overlook. Since it hit a ten-month low in early November, the country’s benchmark VN Index has jumped by 23%. That beats the 20% threshold that is a widely accepted definition of a bull market.

So what’s gone right? Global factors play an important role: the worldwide rally began in the late autumn, and investors began to eye up traditionally risky, small frontier markets such as Vietnam. Unlike many emerging markets, it’s cheap, says Mark Mobius of Templeton Emerging Markets.

He says some stocks, including fast-growing food and pharma firms, are around 30%-50% cheaper on around six times earnings than in other emerging markets. The latest rally has propelled the market’s price/earnings ratio to a three-year high of 12.8 – still reasonable.

There is also a sense that the economy may finally be putting a bout of turbulence behind it. Last year GDP growth fell to a 13-year low of 5%. A Chinese-style, state-mandated lending spree, designed to ride out a fall in exports during the global crisis, had caused a property glut and a sharp rise in bad loans. Banks thus reduced lending, hampering growth. Corruption in the banking system was also exposed.

Now the government seems to be starting to grapple with structural problems. It has discussed forming a debt-management company to tackle the banks’ bad loans and said it is considering an increase in foreign ownership limits in Vietnamese banks.

The 49% cap on foreign ownership of listed firms may also finally be on the way out. Lowering the state’s share of the economy and attracting more foreign investment are key to boosting growth. A fall in inflation has also buoyed sentiment.

The longer-term outlook, meanwhile, remains compelling, says Klaus Methfessel on Vietnam boasts a wide array of natural resources. It is an oil exporter and the world’s second-biggest coffee exporter. It has a young and well-educated population and wages are still around a third of Chinese levels, so the country remains attractive to foreign firms.

Vietnam, reckons Mobius, “has the potential to be another Korea”. Our favourite Vietnam play, the London-listed Vietnam Opportunity Fund, is still available on a discount of 26% to its net asset value.