China’s stock markets have recovered strongly from their deep summer plunge. Stocks overall are up 17.7% from their August low, and alongside the recovery, debt markets are starting to look frothy as investors have moved their speculative capital into bonds. Earnings for Chinese companies plunged in the third quarter, which suggests that the stock market recovery and the bond jump are overdone. Companies’ creditworthiness has been tumbling in China, yet financing has been getting ever easier as eager investors buy up new issues, sending interest rates downward. Spreads to Chinese government bonds have been tightening despite the deteriorating credit outlook.
FINSUM: The capital controls in China seem to have a distorting effect on financial assets, as there is a flood of capital that has little place to go even when the macroeconomic backdrop looks weak.
Source: Financial Times
India’s prime minister, Narendra Modi, has forced himself into a very tense issue surrounding the upcoming Paris climate talks. It is hoped that the world’s nations will come to an agreement on containing the global climate this month in Paris, and ahead of that, Modi has declared the developed nations must shoulder the largest burden. Modi says that the developed world built itself on fossil fuel, and thus it would be immoral for those nations not to shoulder the largest burden in containing emissions and climate change. Developed nations on the other hand, think that no deal can be made unless large emerging economies take on a big burden of changing their practices. India is the world’s fourth largest emitter behind China, the US, and EU.
FINSUM: Honestly, given the state of world politics, and the huge politicization of climate change, we think it is very unlikely that countries will agree to a comprehensive accord. In the spirit of many EU deals over the last few years, we expect a symbolic agreement short on details.
Source: Financial Times
For those interested in macroeconomic themes, the Wall Street Journal has run a piece arguing that the long-standing development model of export-led growth is faltering. For over a century the easiest route to wealth for poor nations was to build up strong manufacturing sectors, which created jobs and wealth for workers. However, that model now appears to be broken as “premature deindustrialization” appears to be hitting poorer nations around the world, such as India. Manufacturing’s share of the economy there has fallen from 19% to around 17% since the 1990s, and is contracting despite the fact that it never reached high levels. The same is occurring in other parts of South Asia, Latin America, and Africa. A big part of the issue has been competition with China, which has revolutionized manufacturing. Additionally, trade barriers are falling, which is making it harder for countries to protect their producers. Another forward looking factor is that as the world’s population ages, especially in developed countries, demand for all manner of goods is going to fall, which may continue to wound manufacturing.
FINSUM: This is a very interesting macroeconomic piece that helps understand why EM growth has been, and may stay, quite weak.
Source: Wall Street Journal
Something very curious is occurring in China’s debt markets—they are both booming and busting at the same time. The country experienced its very first default last year, and has this year seen six from across different industries. The outlook for the country’s highly indebted companies is bleak because of slowing economic growth. All of this would usually mean investors would shy away from the market and demand substantial risk premiums, however, the opposite is occurring. Investors are pouring into new corporate bond issues, which is driving interest rates down and making it very easy for companies to sell new bonds. The spread is now narrowing between government and corporate bonds, and as of early November stood around only 1.3%. China is now the world’s third largest bond market, having grown rapidly in recent years.
FINSUM: China’s capital markets have always been a very unusual place, but the mix of capital controls and the summer’s slumping equity markets is probably pushing lots of domestic capital into bonds, despite the risks.
Advisor’s Corner: Vietnam in the Spotlight
By Louie Nguyen
Louie Nguyen, CFA is the sub-advisor of the Christopher Weil & Company Global Dividend Fund (CWGDX) and CIO of San Diego-based Soledad Investment Management. Soledad invests qualified clients’ assets in markets around the world, including Vietnam
Vietnam 3rd Quarter 2015 Commentary
The Vietnam economy is as healthy as we have seen in the last five years. Vietnam has become hot again for foreign investors. The Vietnam Securities Depository (VSD) granted 50 trading licenses to foreign institutions in October 2015, the highest level since January 2010 when the survey began. In the first 10 months the VSD issued 253 licenses to foreign institutions versus 263 for FY2014. We are ready to take advantage of buying opportunities as they arise.
The Vietnamese government is slated to divest all of its shares in ten businesses in the next two years. Some of these companies include giants like Vinamilk, FPT Telecom, and Bao Minh Insurance. These holdings are valued at approximately US$3 billion, which the government plans to utilize to boost investment in the healthcare industry. Building quality new hospitals has become an urgent need as many Vietnamese citizens prefer to receive treatment in Singapore instead of Vietnam. The divestiture plans coincide with government willingness to open its markets in accordance with the TPP.
While we are optimistic given the encouraging macro news and introduction of market friendly regulations, we continue to remain cautious as we increase our holdings of companies with attractive value.
Foreign ownership limit (FOL) expanded to 100% from the existing 49% effective September 1st, 2015. Until now, the max that foreign investors could hold of a Vietnamese publicly traded company was 49% (30% for banks). Exceptions to the 100% FOL include banks, telecom, airlines, restricted sectors and defense. Each company has the option to expand its FOL through shareholder approval. Vietnam Dairy Products JSC, otherwise known as Vinamilk, VNM, issued a statement announcing that the company would increase foreign ownership limits to the maximum allowed by government regulations. This will allow more liquidity in Vietnam’s largest company as calculated by market value and is seen by many as great news for Vietnamese markets.
On July 7th, Vietnam Secretary General Nguyen Phu Trong visited President Obama in a historic visit that seems to hint of a new greater and more fruitful relationship between the US and Vietnam. About a week prior 12555 HIGH BLUFF DRIVE SUITE 180 SAN DIEGO, CALIFORNIA 92130-3005 MAIN 858.724.6070 FAX 858.724.6080 SOLEDADINVESTMENT.COM
to the historic visit, on June 25, Vietnamese government announced a series of deregulations designed to make Vietnam a more attractive investment environment. The pair discussed trade including the Trans-Pacific Partnership (TPP), climate change and cooperation on defense issues. Human rights concerns were also a topic for discussion as an element for an improved relationship.
Asian stocks dropped for a fifth straight month, the longest losing run since 2008. The MSCI Asia Pacific Index experienced its worst quarter in four years dropping 14% for the reporting period. China’s stock market was volatile throughout the reporting period, as the Shanghai Composite Index fell from its highs in mid-June to end
down 19.3%. This was its biggest drop in seven years. China, whose recent economic growth has stalled, is affecting other emerging market economies dependent on China. Vietnam, however, was Asia’s best performing market. This can be seen in the below chart. The MSCI Southeast Asia Index which was down 23% for the six months ending September 30, 2015 as Vietnam’s Ho Chi Minh exchange stayed positive up .5%.
The Vietnamese stock market Price to Earnings ratio is trading at approximately 12.5x which to compare favorably to other Southeast Asian markets including the Philippines and Indonesia at 18.5x and 14.4x, respectively.
China, the world's second-biggest economy, devalued its currency on August 11th 2015. In addition, China’s central bank attempted to curtail a drastic decline in stocks with an interest rate cut aimed at stimulating an already battered financial market. In response to the Chinese move, the State Bank of Vietnam (SBV) devalued its currency. After devaluing the Vietnamese Dong (VND) in August, the State Bank of Vietnam (SBV) repeated statements that a further devaluation would not be necessary. In an attempt to control exchange rates, a plan to cut interest rates was scrapped during the reporting period. While this placed a burden on businesses it was considered the proper strategy to eliminate a run to US dollar (USD) and keep the VND attractive to investors.
Vietnam GDP growth over the reporting period increased 6.5% over the same period last year, setting a record high figure. Agriculture also expanded 2.1% as Services also rose 8.4% which was above the previous years’ figure of 6%. Vietnam’s CPI rose .4%, while inflation levels hit a 10-year low during the reporting period. Vietnam’s economy continues to see relative strength in its growth outlook as the country improves economic agreements with many developed economies. While China was Vietnam’s largest trade partner, the U.S. has increased its growing importance with the Southeast Asian region. Vietnam exported to the US $8.2 billion worth of goods in the 1st quarter compared to $4.9 billion to China. Consumer demand increased over the reporting period as a result of the improving economy. This leads to lower unemployment and improved incomes creating opportunities for consumer lending. Also, the average value of consumer loans has increased from a few million dongs to several hundreds of million dongs in a very short period of time. Transparency in credit institutions has also improved perception of lending activities, but more still needs to be done in this area. The Vietnam government is targeting growth of 6.2% for 2015. Industrial production improved as electricity, gas and water components showed the strongest growth once again. GDP and other vital figures are detailed in below chart
Even with strong GDP growth, Vietnam’s manufacturing sector contracted slightly for the first time in over two years. Declines in output and new orders were the chief components to this decline. However, firms continued to hire more workers as employment increased for the time period. Lower fuel prices helped input prices to decline, whereas the overall effects of weaker demand throughout the region was detrimental to local manufacturers.
This reporting period witnessed the finalization on October 5, 2015 of the Trans-Pacific Partnership (TPP) negotiations which brings opportunity for Vietnam’s economy. Industry experts are excited about the benefits of the largest trade pact in a generation. The TPP deal which seeks to open commerce in 40% of the world’s economy is now pending approval by lawmakers of each participating country. The countries include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the U.S. and Vietnam. The TPP pact will create the world’s largest free-trade zone and will be most beneficial to Vietnam’s textile and garment industry. Overall, it will provide a positive stimulus for Vietnam’s economic reform and development. The pact should help improve exports, foreign investment and the push for the country to change its development model.
Strong Performer in USD during the reporting period
JS Bank for Foreign Trade of Vietnam (VCB) VCB’s stock price was up 20% for the reporting period and announced profits of $202 million. VCB also announced a comprehensive cooperation agreement with Vietnam Airlines (VNA) that will establish long-term effective policies that will benefit both organizations. VCB will provide VNA diversified banking and financial services and VNA will provide preferential policies to passengers, goods, luggage and parcels for VCB. VCB, a commercial bank, attracts deposits and offers consumer and corporate loans, and foreign exchange services, and sponsors credit cards.
Weak Performer in USD during the reporting period
Dong Phu Rubber (DPR) experienced a slowdown in its manufacturing business which affected profits for the reporting period. The stock fell 11% on slower demand and sluggish growth. Total revenue as stated by the Board of Directors was VND296 billion with profit after tax VND96.07 billion. Total assets were VND2291.87 billion for period ending June 30th 2015. Dong Phu Rubber JSC is a diversified holding company. The company is involved in various sectors from rubber tree planting to rubber processing, agro-forestry exploitation, cattle and fowl rising, construction and property.
For those interested in emerging markets, or worried about how they might be affected by rate rises, here is a good piece. The article says that by one measure, emerging market equity valuations are now at their lowest level ever. In another shocking stat, emerging market stocks have returned -2.1% since the start of 2010, while developed markets have returned 69.1%. However, despite this seeming to be a strong signal to buy EM stocks, analysts say they still aren’t cheap enough. One analyst from JP Morgan summed it up this way, saying “the latest leg of correction leaves emerging markets as the unambiguously cheap segment of global equity on a fundamental basis [but], with the exception of Russia, valuations simply haven’t become cheap enough”. By the end of September the MSCI Emerging Markets Index fell to just 12.8x ten-year average earnings, lower that at the bottom of the 1997-1998 Asian financial crises.
FINSUM: Emerging markets do look cheap, but based on economic fundamentals, it seems they may still have further to fall before they turn around.
Source: Financial Times