Vietnam’s stock market has been among the world’s leaders year-to-date. Historically, the VinaCapital Vietnam Opportunity Fund is always among the best performing funds over any intermediate length of time. VinaCapital’s Chief Investment Officer provides the firm’s market insights in this interview. Prior to working at VinaCapital, Andy Ho held positions as Director of Investment at Prudential Vietnam, with the investment arm of Dell Computers, and at Ernst and Young. Mr. Ho is also engaged in private equity transactions in Vietnam. He has completed deals in excess of $700 million in Vietnam when he is not managing VinaCapital’s public equity portfolio.
Jon Springer: The Vietnam Stock Exchange Index (VNI) is up over 10% year to date. What are the factors currently driving the market?
Andy Ho: In January the VNI increased by 10.3%. Year to date [as of Feb 20, 2014] the VNI increased 13.1% [to 571] and trades at a trailing PE of 14.2 times. The extraordinary level of foreign net inflow has been the key driver, with ETF’s being the main channel. Year to date foreign net inflow has been US $108m.
Those are the direct factors. Indirectly, we can look at a number of factors that make Vietnam an attractive destination at the moment. A lot of it has to do with an economic environment that is quite stable measured in terms of inflation, currency in terms of the U.S. dollar and political stability.
This stability has been going on for 24 to 36 months now. I think it has reared its head as a major point because there is a lot of instability in various countries around the world. When QE3 tapering was just a rumor in late 2013, we saw a lot of emerging economies’ currency devalue significantly against the U.S. dollar which created a perception of instability around emerging markets but at the same time Vietnam showed a very stable currency that didn’t lose any value. Thus, over the last six months people began to realize there is a lot of uncertainty and volatility in emerging markets around the world yet they have to put some money to work in emerging markets. Vietnam has basically shined above other emerging markets in terms of economic and political stability which has attracted a lot of investors to look at Vietnam.
Further to that, there has been a tremendous of sticky money – FDI, foreign direct investment – coming into Vietnam. The reason we call it sticky is because it doesn’t leave on the whims of people discussing QE3 tapering or other news related volatility. This is money that is invested for the long term. This comes from folks like Samsung opening up their factories in Vietnam. Samsung is producing about 25% of their smartphones worldwide in Vietnam now and pushing toward 40% in the next 12 to 18 months. There are a lot of FDI investments like this coming into Vietnam now. The commitment was well above $20 billion in 2013. This has led to a lot of positive news for Vietnam.
What this has led to is FII, foreign indirect investment, coming on a net basis over $100 million year to date in 2014.
VinaCapital’s Economic Report for February 2014 examines the stability of economic growth, the currency and (above) the inflation rate.
If you look further, about 2 or 3 months ago the price to earnings [PE] ratio was very inexpensive. The market was 15% lower 2 or 3 months ago. So PE valuation now is in line with regional markets at 14 to 14.5. Before the run-up we were trading around 12 times. Now the argument is we’re in line, can we do better? I think we can do better if we show good earnings growth and Vietnam continues to have good political and economic stability.
At this level of PE ratio, we are at a similar level to Thailand which is going through a lot of turmoil. In theory we should be trading at a premium valuation to Thailand based on their current issues. The market will dictate this over the next 3 to 6 months.
Springer: You don’t feel the new laws that allow more foreign ownership of companies is impacting the stock exchange valuations?
Ho: I think it is more a perception. The move from a 49% cap to a 60% cap is not going to effect a lot of companies to be honest. The key companies that are trading at the limit already such as VinaMilk are mainly owned by state owned enterprises [SOEs] that have come out and said they are not interested in selling. If they are not selling, how can the foreigners buy more? I think it is good news for the stock market in the medium to longer run that the foreign ownership limit is expanded from 49% to 60%. But, in the immediate future, it is unclear how investors like ourselves will benefit.
Springer: With markets from China to the United States facing some headwinds, are Vietnam’s markets impacted by those headwinds?
Ho: Sure. Domestic and international investors should be sensitive to these headwinds, especially as the market of the VNI has increased over 13%. I think there will be a lot of people taking profit at this level. Vietnam is an international player and any such headwind like those faced by China will certainly impact Vietnam. We encourage domestic and international investors to be sensitive to that.
If interest rates go up in the United States, more people will keep money in the U.S. and buy U.S. Treasuries or put it in U.S. deposits and be less likely to take risk. That certainly takes more money away from emerging markets such as Vietnam. China slowing down could potentially mean there will be less exports from Vietnam to China. China is a huge trade partner and if China slows down that means less demand for Vietnamese goods.
On the other hand, I think there are a lot of international investors looking for emerging market risk and finding that they have few choices; and thus Vietnam becomes even more interesting. At the moment, one can see that there is political turmoil in all parts of the world from South America (Venezuela) to Eastern Europe (Ukraine and Turkey) to Southeast Asia (Thailand). And in addition, there has been a lot of currency volatility in the emerging economies. Vietnam, with a stable Vietnamese Dong against the U.S. dollar and no political unrest coupled with a steady and growing GDP and a large population becomes awfully interesting at this time.