Given the worsening crisis in Europe at the moment, UK investors have plenty of woe right on their doorstep. So I’m going to revisit a troubled economy on the other side of the world – Vietnam. While it can’t compete with Italy for headline space, nobody has a nice word to say about it either.
I think that’s a mistake. As we’ll see, the key indicator that Vietnam is turning the corner now looks very encouraging. And a lot of the pessimism is overdone.
But before we get onto that, I’m hoping someone can help me answer a frequent reader request.
The difficulty of getting good data
After I wrote about using the price/book ratio as a guide to when Asia is good value last time: The number that reveals when Asian markets are cheap, several people asked me where they could find data such as price/book, price/earnings and dividend yield for international indices. This isn’t the first time this question has come up and unfortunately I don’t have a good answer.
I’m lucky enough to have access to a Bloomberg data feed and that’s what I use for most of my data. But that’s extremely expensive. You’d expect there to be a more low-cost source for the basic data covering global markets aimed at private investors – yet I’ve never been able to find one.
There are a couple of very limited resources available. The market data section on the Financial Times website will give you a report with the current price/earnings ratio and dividend yield for a fair number of countries. (It’s the bit at the bottom labelled Data Archive.)
And having just bought an iPad, I’ve discovered that the free Bloomberg iPad app will give you the latest price/earnings ratio for practically any index. However, this data isn’t available on the standard website.
Overall, these don’t really solve the problem. So I’m wondering if any readers know of anything better. Are there any free or very cheap sites out there that offer reliable fundamental data for a good range of global indices?
Please drop me a line if you’re aware of anything. I know many readers would be grateful for suggestions (MoneyWeekAsia@moneyweek.com).
And now onto today’s main topic.
Where now for Vietnam?
Regular readers will know that I have been writing about Vietnam and how the market offers exceptional value for a long time. And so far, that value has conspicuously failed to deliver any profits, as the chart below demonstrates only too well.
Once viewed as the next ‘Asian Tiger’, sentiment on Vietnam is now pretty glum, as a recent article in the FT demonstrates. Unfortunately, you need to be a subscriber to read the whole thing, but these quotes give you an idea of the tone:
“The government’s focus on breakneck growth at the expense of economic stability has led to growing inequality, soaring inflation, a lack of confidence in the currency and fears of a banking crisis.
“Domestic overheating, coupled with the deterioration of the global economy, has forced many investors, foreign and Vietnamese, to revise their view of the country’s prospects. Deep-seated problems, such as corruption, poor education and infrastructure bottlenecks – all often overlooked by investors in the boom years – have moved into sharp focus.
“And with inflation driving wages higher but labour skills not advancing as quickly, fresh questions are arising. Among them is whether Vietnam’s Communist party can force through painful reforms needed to ensure they avoid the “middle-income trap” ensnaring the likes of Malaysia and Thailand, whose economies are a source of cheap labour but not yet makers of higher-value products.”
Pretty bleak stuff – and to an extent deservedly so. There’s no question that the government badly lost the plot in 2009-2010 and the economy suffered as a result.
I’ve written about their mistakes several times, so to avoid this email being too long, I won’t go into all the details again. In essence, the government kept monetary policy too loose, while encouraging the growth of inefficient state-owned enterprises. (If you want to read the details of what went wrong, I included more background in an early draft of this article here.)
These mistakes led to excess credit growth, the worst inflation problem in Asia, a loss of confidence in the currency and various other unwanted consequences. From being a potential tiger, many investors started viewing Vietnam as a basket case.
So why is it worth investing now? In my view, two reasons. The first, is that the government seems to be tackling the immediate problems and things should improve from here. The second, is that nobody yet believes this, so the market is still very cheap.
Getting to grips with inflation
A couple of weeks ago, I had the chance to catch up with Kevin Snowball, manager of the PXP Vietnam Fund, on a marketing trip. The first slide he showed me from his presentation was the one below, which shows Vietnam’s inflation problem – year-on-year (white line) and month-on-month (blue).
This chart is a very encouraging sign that the government has finally got a grip. Yes, yearly inflation is still very high, because prices rose so much earlier this year. But if you look at the recent monthly trend, it’s been declining steadily.
Inflationary pressure is petering out. If this trend continues, the yearly figure – what everyone focuses on – is going to come down very sharply, very soon.
Controlling inflation – along with restoring confidence in the currency – is absolutely crucial to putting Vietnam back on track. To do that, policymakers have had to tighten credit very significantly.
As result, the economy is feeling the squeeze right now. Many smaller banks and overextended real estate firms are scrabbling for cash. No wonder sentiment is poor and the market isn’t performing.
But there’s no way out of this kind of situation without a wrenching adjustment. It’s only when inflation comes down and economy cools off that everyone will realise that it was necessary and worthwhile.
The market is cheap and the risks are limited
It’s only then that investors – local and foreign – may start coming back to the stock market. I don’t know whether that will be three months away or six or more.
But Vietnam is cheap if you have the patience. Depending on what estimates you use, the VN Index is on around seven to nine times forecast 2011 earnings and six to eight times forecast 2012 earnings. There aren’t many markets on those kinds of valuations.
What are the risks? In the near term, investors fear that sorting out bad loans in the banking sector and state-owned enterprises will put the government finances under too much pressure.
That combined with low FX reserves could lead to a traditional emerging market sovereign crisis at a time when global conditions aren’t favourable to anyone who gets in trouble. That’s certainly possible.
But Vietnam’s position doesn’t seem as vulnerable as you might think on first glance. Yes, the public debt to GDP ratio of 53%, with about 60% of that owned to foreign creditors. That sounds alarming.
But it shouldn’t have the kind of problems with unsupportive foreign creditors currently roiling the eurozone. As the chart below shows, the majority of foreign debt is owned to other governments (mostly Japan) and multilateral institutions (the World Bank and the Asian Development Bank).
Overall, as long as the government keeps up the fairly credible policies they’ve been following this year, Vietnam should avoid the worst. However, if they were to revert to the inconsistency they showed in 2009-2010, it would be much more worrying.
In the longer term, the big worry is the one mentioned in the FT piece above. That’s whether Vietnam will progress in the way that people expected a few years ago or whether structural problems will leave it stuck in the “middle income trap”.
In fact, it’s a matter of some debate whether this trap really exists. But let’s assume it does and let’s take Malaysia as a good example. With that in mind, take a look at the chart below.
On the left, we have Taiwan – one of Asia’s greatest development success stories. It’s an advanced economy with a high level of innovation and a leader in many areas of technology.
In the middle, there’s Malaysia, caught in the middle-income trap.
And on the right, there’s Vietnam. Which today is clearly so far behind Malaysia that the question of whether it will end up in a middle-income trap is irrelevant.
Vietnam’s near-term prospects are about whether it can grow its low-cost semi-skilled export manufacturing industries successfully, not whether it can evolve into a skilled economy. That’s a big issue for the long run, but won’t affect what the stock market does in the next few years.
Two funds for Vietnam investors
So I still think that Vietnam offers a very good potential return. It’s clearly a high-risk prospect – this is a frontier market. But for that part of a portfolio, I think it’s one of the cheapest investments out there.
I wrote about some Vietnam funds in more detail several months ago (see the end of the linked article). Briefly, I don’t think exchange traded funds (ETFs) are attractive here, due to limitations on what they can hold.
There are a few London-listed closed-end funds that are better prospects. Best-known is the Vinacapital Vietnam Opportunity Fund (LN:VOF).
This holds a mixture of listed shares, unlisted shares, real estate, private equity and debt. It currently trades on a discount of about 40% to net asset value.
An alternative that only holds listed equities is the PXP Vietnam Fund (LN:VNF), mentioned above. It currently trades on a discount to NAV of 10% (obviously the discounts for these two funds should not be directly compared because there less certainty about the current value of unlisted assets).
Some more details of both can be found in the article above. Be aware that the Vietnam Opportunity Fund trades frequently, while the PXP Vietnam Fund trades infrequently and so is only suited to long-term investment.
(Disclosure: I have a small investment in the PXP fund.)