“The last few years have been challenging times for Vietnam,” says Irvin Seah of DBS Bank, an Asian financial services group. Growth has been strong, but it’s clear that not all is well. At 22%, “inflation is by far the highest in the region and is likely to rise further”, says research consultancy Capital Economics. And the banking system “is clearly stressed, with very low levels of deposit growth, given recent nominal economic growth rates”, says Robert Horrocks of Matthews Asia, a funds group. This reflects a lack of confidence in the dong – many Vietnamese prefer to hold US dollars or gold.
Earlier this year, the government began taking action to cool the overheating economy. And this tightening has driven Asia’s worst-performing stockmarket to new lows: in May, the VN index lost 20% in a few days. That was over concerns about new restrictions on bank loan books that will limit unproductive credit – essentially lending for real-estate and stockmarket speculation – to 16% of loans by year end. “The government has a very delicate balancing act to perform,” says Dragon Capital, a Vietnamese asset manager. “It must carry on imposing fiscal and monetary discipline to ensure the long-term future of the economy. But it does not want to kill growth off in the process, much less prompt a financial crisis.” Until investors see evidence that this can be done – it may take until 2012 – a strong rally looks unlikely.
On the plus side, the May slump looks like the kind of capitulation that suggests the worst could be over for stocks, says Kevin Snowball of PXP Vietnam Asset Management. It remains to be seen if it marks the absolute low, but the market looks very cheap. And there are signs that fundamentals are improving. The convergence of the official and black-market dong/US dollar exchange rates signifies a return of confidence and, with month-on-month consumer price inflation numbers likely to continue to decline from here, “we feel that the risk/reward ratio is starting to turn positive”.
Vietnam still looks attractive on a long-term view. Vinacapital’s Vietnam Opportunity Fund (LON: VOF) is the best known option. The PXP Vietnam Fund (LON: VNF) is less liquid but is main-board listed and so Isa-eligible.