Investors touted Vietnam as the “next China” as it entered the WTO in 2007, and capital poured in, fueling real estate and stock market speculation. A market crash around 2008 left investors holding overvalued assets. Vietnam was shunned as a market for years afterwards.
Since then, Thu said, the economy and markets have matured. GDP growth is around 6.5%. Inflation has improved to 0.1% this year (from 20% in 2007-2011).
Markets have developed as well. In 2006, just before the hot money came in, stock market capitalization was around $11bn and today it is $61bn. The market is trading around 11-12x (compared to 40-50x in 2007).
Thu has a preference for several sectors. The fund’s overweights include transportation, technology and construction materials. The materials sector benefits from the government drive to develop nationwide infrastructure, often through public-private initiatives, she said.
Thu also likes the food and beverage sector and the fund’s top position is in Vinamilk.
The market is trading around 11-12x (compared to 40-50x in 2007).
Less favourable sectors include banks. The fund holds about 10% in banks, compared to the market index which has a 28% weighting. She said the index includes many banks going through restructuring and those with poor asset qualities.
“We don’t dislike the banking sector but we are very discerning in banking positions.”
Energy gets an underweight, and the fund has only one energy stock -- PetroVietnam Technical Services -- in its top 10 holdings. Thu believes the company’s services business addressing both state and private sectors makes it is less sensitive to the fall in oil prices.
She sees some earnings decline this year and next, but believes the business will still be thriving compared to peer companies.
The valuation was cheap at 6x PE, half the PE of the market, she added.
The biggest risk is currency devaluation, and the firm believes the Vietnamese dong will devalue 3-5% in 2016. “This will be driven by the economic situation in China, which is unlikely to improve next year,” Thu said.
Depending on China’s economic health, manufacturers could dump goods into Vietnam, undercutting local company earnings particularly in the basic materials sector.
Moreover, if China’s yuan is devalued further, it will have an impact on Vietnam, which exports to some of the same countries as the PRC. The government may then devalue the currency to maintain competitiveness, a move that would ripple through markets.
Some recent policy decisions are attracting investor attention and bringing in foreign direct investment (a record $14bn this year).
Foreign ownership in equity markets had been restricted to 49% until June this year, when the government issued a decree ("Decree 60") to open markets to full foreign participation. The response has been tepid, but Thu believes it will pick up.
The privatisation decree has some links with another macro-tailwind, the Trans-Pacific Partnership, a sweeping and aggressive trade pact with 12 nations including the US and Vietnam that is now close to implementation.
“TPP opens Vietnam up to competition, which means they have to evolve to compete at international level, not just nationally. The best way to do that is through privatisation,” the firm said.
Thu believes Vietnam will be a top beneficiary of the TPP due to the large manufacturing base and the promise of tariff reduction between member nations.
Vietnam’s exports to the US and Japan account for 40% of the country’s total exports.
The amount of tariffs Vietnam currently pays to the US is close about 45% of the total tariffs the US collects from all other 11 countries in the TPP, she said.
“China and Taiwan and would be most interested in using Vietnam as a manufacturing base to export to the US with duty reduction.”