Eq: EMs
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
Market 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/Weak Performers
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
The Financial Times has published a wide-ranging and in-depth article which looks at the way in which emerging markets have gained, and may now lose, from ultra-low interest rates. The piece explains that an extraordinary amount of capital—to the tune of $7 tn—has flowed into emerging markets since the Fed began QE in 2008. During that time, emerging markets have gorged on debt to the point where private sector debt is greater on a percentage-of-GDP-basis than in developed markets immediately prior to the Financial Crisis. And now that the Fed has turned off QE, companies across emerging markets, including in China and Brazil, are now having trouble paying their debts. It also makes the interesting point that huge levels of access to capital may have created massive amounts of debt that are hard to detect until they burst.
FINSUM: We are unsure how rate rises are going to play out in emerging markets, but it seems that the slower rates elevate the better, as it will give countries time to adjust. A rapid rise seems like it could completely lock up access to credit across EMs, which would certainly cause a strong recession.
Source: Financial Times
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For the second time under PM Shinzo Abe’s leadership, Japan has just re-entered recession. The country’s economy shrank 0.8% annualized in the third quarter as corporate investment declined and the nation took a hit from China’s issues. The data show that the PM’s plan, dubbed “Abenomics”, is continuing to have trouble reviving the economy. The data show that this past quarter was the fifth out of 11 in which the nation’s economy has contracted. Two consecutive quarters of contraction are commonly considered a recession.
FINSUM: Japan’s legacy economic issues and proximity to China did it no favours in the third quarter. Abenomics continues to fall flat.
Source: Wall Street Journal
Here is an eye-opener—Chinese stocks have just returned to a bull market. As everyone will know, Chinese stocks tumbled in the summer after a huge run upward in the first half of the year. The volatility seen shocked the world, sparked a major global selloff, and seemed to be a major factor in the Fed holding off on September rate rises. However, despite all this, a sense of calm has returned to the Chinese (and global) markets. Chinese GDP data, which was better than expected, helped allay fears of a “hard landing” for the Asian economy, and further accommodative action by the government was received as good news. The Shanghai Composite was up 10.8% in October and has gained 20% from its late August low.
FINSUM: It remains to be seen how things will play out for the Chinese economy, as despite the better-than-expected figures it is still slowing. However, that may be a moot point as the government-controlled data seems rather fudged.
Source: Financial Times
The renewed hawkishness from the Fed brings to mind the dire straits some emerging markets will be in once the US hikes rates. However, despite the grim outlook, Goldman Sachs says many EM bonds are still a good buy. The bank says that certain EM bonds, such as Eurobonds from developing nations, still look very attractive, as they hold 400 basis points spreads versus US Treasuries, enough to cushion for rate hikes. “The case for looking for yield in emerging markets remains intact”, says Yacov Arnopolin, a Goldman fund manager who helps oversee $36 bn of EM debt.
FINSUM: The bulk of the argument here seems to be based on a view of how spreads will react to tightening, and in what time frame.
Source: Bloomberg