Should You Be Investing in Vietnam?
As a general investing overview, it seems fair to observe that one of the largest challenges that looms large in the mindset of many investors is what you could classify as recency bias. The basic premise is to identify assets which have performed well and then betting your chips on the trick being repeated again in the future.
Anyone who has been watching recent events unfold in global financial markets will have had a rude awakening and the concept of what is normal or even relying on history repeating itself has been well and truly challenged with scenarios such as bonds outperforming stocks over a 30 year period, which is something that has happened for about 150 years previously.
The relevance of painting this investment picture is that it seems a good time to reset your mindset and not allow past investment prejudices to cloud your judgment of what could be a potential opportunity going forward, regardless of what has gone on in the past.
Buying into the unconventional could be where the profits are going to come from and if you can find a market where valuations are relatively undemanding and offer the potential, it is worth taking a look.
Vietnam is a market which is largely overlooked, probably because many investors have preconceived ideas based on the country’s history, so are you prepared to be that unconventional investor who bets that the country could become an Asian economy which delivers solid or even spectacular returns?
The positive clues are there
You can argue generally that Asian economies still look attractive when compared to those of the West, even allowing for the recent growing pains suffered by the Chinese economy.
When you compare basic economic fundamentals, most Asian economies fare better than their Western counterparts and they also have healthier banking systems and better demographics too.
Vietnam is no exception to that scenario and other positive clues that investors could be rewarded include the fact that nearly half of its 94 million population is aged under 30, and its market capitalization rate to GDP ratio is a modest 30%, which is currently the lowest in Asia.
Another point that is beginning to attract some investors attention is the fact that Vietnam has a competitive wage structure which is less than half of the average wage in China. This is helping it to attract some fairly significant inflows of foreign capital.
It is an educated workforce too, and this has been pivotal to recent economic success, with a healthy 93% of the population deemed to be literate. Vietnam actually ranks close to Germany for mathematics, reading and scientific grades and even outperforms the United States and the majority of Western Europe on that score too.
All of these positive clues would suggest that Vietnam should be performing stoutly and outstripping other Asian markets, but this has not been the case for the last five years.
It seems that Vietnam was not immune to experiencing the rather familiar issue of unsustainable growth and this is illustrated by the fact that the country’s ratio of credit to GDP rose from 35% in 2000 to an alarming 125% in 2010.
This had the effect of inflation reaching a tipping point of 20% or higher in the last ten years. In a scene played out in other economies, this forced the central bank to intervene and hike interest rates in an effort to restore macroeconomic stability to the country.
The rather inevitable consequence of these actions was a collapse in property values and a huge spike in the number of non-performing loans. These growing pains are certainly a justification for some investors viewing Vietnam as a risky proposition but is that recency bias justified?
Economic stability has now returned to Vietnam and the rampant inflation that stood at 19% at the end of 2011 is now well and truly tamed, standing at below 1% currently.
The country can also boast of having a current account surplus for the first time in twenty five years and interest rates have fallen sharply, which has breathed life into the property sector and allowed it to recover.
Another positive point is that Vietnam’s banking sector has largely been restructured, which is more than can be said for Europe on that score.
There are several noticeable growth drivers that are thrusting Vietnam in a positive direction.
Domestic demand as the population becomes more urbanized is a significant factor, as are exports and foreign direct investment. The Vietnamese government is certainly playing its part by investing heavily in improving infrastructure in order to accommodate the flow of foreign investment.
Vietnam is a major exporter of rice and coffee and also has a prominent role in the export of telephones, electronics, textiles , footwear, oil, seafood and wood.
All of this data paints a positive picture of Vietnam but its stock market has basically flat-lined since it experienced its credit boom and bust back in 2006 & 2007. The government has been successful in returning growth and stability, but their efforts have simply not been recognized or reflected in the stock market valuations.
Seeking out value
To be a successful value investor you should always be looking for the double-whammy scenario when looking at a company, of sound fundamentals and shares that look cheap.
Vietnam has plenty of listed stocks which manage to tick both of those important boxes according to some analysts and in fact, over half of Vietnamese listed stocks trade on a p/e of less than ten times.
One of the reasons why these stocks may not have been noticed by value-seekers is the observation that only an estimated 15% of the 670 stocks listed, receive any broker coverage or commentary.
Vietnam is still classified as a frontier market by index constructors such as MSCI and there is a huge difference in investors perceptions when viewing how a market is classified. The level of institutional money invested in so-called frontier markets is miniscule in comparison with emerging markets.
An emerging market sounds like an exciting proposition and suggests a growing economy, whereas a frontier market seems to scream risky to investors.
If this is your mindset, you should be reassured to learn that Vietnam is widely expected to be promoted from frontier to emerging market status at some point in the very near future. This upgrade could and should open the investment floodgates and therefore you might consider there are opportunities for those investors who anticipate this move and gain some exposure to what appears to be a currently undervalued stock market.
Investing in Vietnam
If you are interested in gaining some exposure to Vietnam, your choices are still fairly limited in comparison to other stock markets, although this is expected to change.
If you are looking at investing via an ETF, there is seemingly only one ETF, the Market Vectors Vietnam Exchange Traded Fund (VNM), which solely invests in companies just based in Vietnam itself.
This fund has net assets approaching $380 million and an average P/E of 15, with a yield of 3.9%.
There are a number of funds which offer exposure to Vietnam through a more general Asian fund. The Pacific Horizon Trust managed by Baillie Gifford for example, only has a 1.1% exposure to Vietnam through its shares in the Dragon Capital Investment Trust, but there are plans to expand their exposure.
The Templeton Emerging Markets Fund holds about 8.5% of its assets in Vietnam and if you are looking at direct investment, foreign investors can take part through individual company shares or mutual funds.
Vietnam is a communist regime but if you are willing to go through an application and approval process, you can set up an account with a local brokerage, so that you can get a securities trading code to be able to trade stocks in your own name.
Financial markets have been demonstrating an ability to shock and surprise investors in recent times and basing your decisions on what has happened in the past in similar circumstances, has not always been the right move.
Looking to the future and not relying on events in the past is in some ways the key to deciding if you want to invest in Vietnam.
It has had to endure a long recovery from civil strife and war back in the late 20th century, but this has helped to lay the foundation stones for the rapid economic growth that we are now witnessing.
Despite the fact that the country is still under communist rule it has been open-minded about the importance of outside investment, so there definitely seems to be an argument for paying to find out if Vietnam can deliver the sort of returns that other more developed economies are struggling to achieve.