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Boom-Bust Vietnam Beats Emerging Stocks on State Role Easing

April 12, 2013

Boom-Bust Vietnam Beats Emerging Stocks as State Considers Role

Workers walk past the Ho Chi Minh City Stock Exchange in Ho Chi Minh City. The VN Index’s advance is almost double the Standard & Poor’s 500 Index’s 11 percent gain since the end of December. Photographer: Francois May/AFP/Getty Images

Vietnam, the world’s most volatile stock market since 2009, is leading developing-nation gains this year as the Communist government slows inflation and considers easing its grip on the economy.

The benchmark VN Index (VNINDEX) posted more 20 percent swings than every major equity market in the past four years as policy makers grappled with consumer prices, currency devaluations and bad bank loans. Their efforts helped cut inflation to 6.6 percent in March from 23 percent in 2011 and produced the first annual trade surplus since 1992.

Now the government is preparing to remove bad debt from lenders, ease restrictions on foreign ownership of listed businesses and change the constitution to limit the “leading role” of state companies that comprise about a third of gross domestic product. The VN Index rose 22 percent this year through yesterday, the most among equity gauges in 47 frontier and emerging markets. After adjusting for volatility, the measure had the 16th-biggest gain, data compiled by Bloomberg show.

“There’s an attempt to move beyond just re-establishing macroeconomic stability and get seriously into addressing the root causes of the instability,” said Dominic Scriven, who co- founded Ho Chi Minh City-based Dragon Capital in 1994 and now oversees about $1.1 billion as the firm’s chief executive officer. “The government itself has identified these problems in allocation of capital, problems in the banking sector and problems in the state-owned enterprises.”

Bull Market

The VN Index fell 1.9 percent to 494.27 today. Its advance this year compares with the Standard & Poor’s 500 Index’s (SPX) 14 percent gain. The U.S.-listed Market Vectors Vietnam exchange- traded fund (VNM:US), which tracks the Southeast Asian nation’s shares, rallied 12 percent. The BofA Merrill Lynch US Treasury Index rose 0.2 percent in the period, while the S&P GSCI Spot Index of 24 raw materials fell 2.3 percent.

The Vietnam measure produced a risk-adjusted return of about 1 percent after dividing this year’s gain by the index volatility reading of 24. The gauge has posted 11 swings of at least 20 percent since 2009, a threshold that signals bull and bear markets. It took the S&P 500 three decades to record the same amount of volatility, data compiled by Bloomberg show.

Earnings Outlook

Vietnam’s government is reviving confidence after the economy expanded at the slowest pace since 1999 last year and Moody’s Investors Service cut the nation’s credit rating by one level to B2, five steps below investment grade, in September on rising nonperforming loans at banks. The Communist Party apologized to the nation for “big mistakes” in an Oct. 15 statement by General Secretary Nguyen Phu Trong that was broadcast on state radio and television.

Interest rate cuts by Vietnam’s central bank will help boost economic growth to 5.6 percent this year from 5 percent in 2012, according to a Bloomberg News survey of three economists. The expanding workforce and Vietnam’s appeal as a manufacturing hub will spur long-term growth, Andrew Brudenell, whose $125 million HSBC GIF - Frontier Markets fund has advanced 23 percent during the past year, said by phone from London April 2.

Vietnam’s $44 billion stock market trades for about 11 times estimated earnings, the lowest level in Southeast Asia. (MXSO) Profits at VN Index companies are projected to rise 25 percent in 12 months, compared with a 17 percent gain for both the MSCI Frontier Markets Index (MXFM) and the MSCI Emerging Markets Index, according to more than 12,000 analyst estimates compiled by Bloomberg.

Mobius Overweight

“Vietnam is going to have more upside, with corrections along the way,” Mark Mobius, whose $1.7 billion Templeton Frontier Markets Fund returned 15 percent in the past year, said in a March 28 interview in Singapore. “Everything in Vietnam is now pretty cheap, even though they’ve run up quite a lot. There are lots of opportunities.”

Foreign investors have purchased a net $195 million of Vietnam shares in 2013, according to data compiled by Bloomberg. Mobius, whose holdings in the country are about twice as big as its weighting in the MSCI frontier index, said he favors shares of rubber, bank, health-care and dairy companies.

Vietnam’s stock-market swings began with a surge in credit growth in 2009 that boosted the money supply by 26 percent, according to State Bank of Vietnam figures. While the jump in borrowing helped spur economic growth of as much as 6.8 percent after the global financial crisis, it also fueled inflation and left some state-owned companies unable to repay debt. Vietnam Shipbuilding Industry Group, the Hanoi-based company known as Vinashin, defaulted on a $600 million loan in December 2010.

Dong Tumbles

The dong weakened more than 20 percent from its 2008 high against the dollar through February 2011, while inflation jumped to an annual rate of 23 percent in August 2011. The central bank responded by raising its refinancing rate to 15 percent two months later, matching the highest level on record, data compiled by Bloomberg show.

Nonperforming loans were about 6 percent of outstanding debt as of Feb. 28, according to Vu Duc Dam, chairman of the Government Office. The government’s NPL estimate may be too low and an actual rate of as much as 20 percent “would not be a surprise,” Matt Hildebrandt, an economist at JPMorgan Chase & Co. in Singapore, wrote in a report e-mailed April 9. China, the biggest developing economy, has an NPL ratio of about 1 percent, according to the nation’s central bank.

Rate Cuts

Vietnam’s economy is showing signs of improving health. Inflation slowed to a six-month low in March and exports climbed at a 20 percent pace in the first quarter. The dong has been stable at about 20,900 per dollar, while the yield on benchmark five-year local-currency bonds fell to a five-year low of 8.19 percent April 10.

“The economy is entering into a more stable growth phase,” Tran Thi Kim Cuong, who helps oversee about $342 million as the head of equities at Manulife Asset Management’s Vietnam Unit, said in a March 29 e-mail.

The central bank may cut policy interest rates by 0.5 percentage point this quarter and next, after reducing the refinancing rate to 8 percent last month, said Alan Pham, who helps oversee about $1.5 billion as the Ho Chi Minh City-based chief economist at VinaCapital Group.

The Communist Party, which has ruled over a reunified Vietnam since 1976, released a draft of the revised constitution for public feedback in January. The document removes language stipulating that the state will “assume the leading role” in the economy. The draft also indirectly acknowledges the private sector.

SOE Overhaul

“This may be a high-level, existential repositioning of the role of the state in the economy,” Dragon Capital’s Scriven said in a March 28 phone interview.

The government plans to start a pilot program to raise the 49 percent foreign ownership limit for some companies, the State Securities Commission said in January.

Policy makers will propose overhauling state-owned enterprises by June, Deputy Finance Minister Truong Chi Trung said in a Feb. 1 interview in Hanoi. Vietnam Airlines, the national carrier, has selected banks to manage an initial public offering, Chief Executive Officer Pham Ngoc Minh said by phone April 9, without giving a time frame for the sale.

The government will decide at the end of April whether to set up an asset management company to take over bad debt from lenders, Dam, chairman of the Government Office, said March 29.

Army Loyalty

Other parts of Vietnam’s economy are languishing. Retail sales growth slowed to 11.7 percent in the first quarter from 21.8 percent a year earlier, the General Statistics Office said on March 27.

Some portions of the proposed constitution have spurred concern that the Communist Party is seeking broader scope to curb political dissent and bolster control of the military.

Civil rights can be limited “for reasons of national defense, national security, public order, social security, moral health of the community,” according to a new clause in the revised document. The armed forces owe loyalty “to the Communist Party of Vietnam, the homeland and the people,” the revision says. The existing version excludes the party.

Seventy-two intellectuals and former government officials produced an alternative draft constitution in January that calls for an end to Vietnam’s one-party system. The draft received more than 12,000 signatures via an online campaign.

Following Nigeria

“The changes in the constitution strive to form a constitution that reflects the common expectation and will of the Vietnamese people,” Luong Thanh Nghi, a spokesman at the Foreign Affairs Ministry, said in an e-mailed reply to questions yesterday. “Gathering public comments on the constitutional draft has been and will continue to be done with a democratic and transparent spirit. Every citizen has a right to comment on the draft.”

Vietnam’s market swings may persist even if the government delivers on its pledges, said Hans-Henrik Skov, who oversees about $275 million in frontier markets as a money manager at BankInvest in Copenhagen.

He cited parallels with Nigeria, which formed an asset management company to buy bad debt from banks in November 2010. Nigeria’s stock index dropped 16 percent in 2011, before rallying 35 percent last year and another 20 percent in 2013.

“It won’t be a one-way street,” Skov, whose BI New Emerging Markets Equities fund has returned about 34 percent during the past 12 months, said in a March 28 phone interview.

Wage Advantage

Consumer stocks such as Ho Chi Minh City-based Vietnam Dairy Products Joint-Stock Co. (VNM), the nation’s biggest milk producer, will prove good bets despite market volatility, Skov said. Vinamilk, as the company is known, has surged 45 percent this year and is trading at 16 times estimated 2013 earnings, data compiled by Bloomberg show. That compares with an average of 22 times for global peers.

Sixty percent of Vietnam’s 90 million people were under the age of 35 as of 2011, according to the General Office for Population Family Planning. The country is luring manufacturers as more people move to cities from the countryside and labor costs rise at a slower pace than in China.

Wages for Vietnamese production workers climbed about 160 percent in the past decade to $1.20 an hour, compared with 340 percent in China, analysts at New York-based Citigroup Inc. wrote in a March 5 report.

Foreign direct investment pledged to Vietnam during the first quarter increased 64 percent from a year earlier to $6 billion, according to the General Statistics Office. Suwon, South Korea-based Samsung Electronics Co. (005930), the world’s largest maker of mobile phones, won approval for a $2 billion manufacturing plant.

‘Good Base’

The gains in Vietnam stocks will probably continue as valuations remain low relative to regional peers, Desmond Sheehy, who oversees about $300 million of Vietnam investments at Duxton Asset Management in Singapore, said by phone April 2.

The firm favors shares of Vinamilk and FPT Corp., Vietnam’s biggest listed telecommunications and software company. FPT has climbed 11 percent this year and trades for 6.1 times estimated 2013 earnings, versus an average multiple of 16 for global peers, data compiled by Bloomberg show.

The VN Index’s forward price-earnings multiple of 11 compares with 13 for Thailand’s SET Index (SET) and 20 for the Philippine Stock Exchange Index. (PCOMP)

“This is a good base for a further rally,” Sheehy, Duxton Asset’s chief investment officer, said in an April 2 phone interview. “The economy every year seems to solve two problems for every new problem it creates, and in that way it keeps getting better.”

To contact Bloomberg News staff for this story: Nguyen Kieu Giang in Hanoi at giang1@bloomberg.net; Michael Patterson in Hong Kong at mpatterson10@bloomberg.net; K. Oanh Ha in Hanoi at oha3@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net


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Companies Mentioned

  • VNM
    (Market Vectors Vietnam ETF)
    • $22.29 USD
    • -0.06
    • -0.27%
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