Most stockmarkets in the developing world have had a tough few years. But as investors have stopped worrying so much about rate rises in the US this year, we’ve seen improving sentiment towards emerging-market assets. I’m not yet completely convinced we’ve reached a turning point, but I think it’s time to watch emerging markets more closely. If conditions start to become more bullish, we could soon see some particularly unloved markets come back into fashion. Chief among them is Vietnam, one of my long-term favourites.
Good news is being ignored
I’ve been waiting for a turnaround in sentiment towards Vietnam for a while and I think we might just be there, for a number of reasons. Let’s start with the politics. While the new prime minister is less reform-minded than his predecessor, the latter is now the general secretary of the ruling party and is still working actively with the new prime minister. In addition, the central bank governor and the minister of finance, who are the architects of the country’s successful export-led growth model, have just been promoted within the party.
Next, there’s trade. We should see various free-trade agreements finalised within the next few years, which should be a huge boost. Third, economic conditions are encouraging. Inflation is running at 2%, GDP growth is at 6.7% and there’s a trade surplus.
The exchange rate is also being carefully managed lower after some recent dramatic volatility. And, of course, there’s the stockmarket itself. Vietnam is keen to be promoted from frontier to emerging-market status by the index providers, which will help attract more foreign investment, and is making reforms to help this process along. So, there’s plenty of good news coming out of Vietnam.
However, investors don’t seem to have taken too much notice. There are concerns about the impact of a slowdown in China and about poor corporate governance in Vietnam. Both concerns are valid, and the latter is a strong reason to use an active fund rather than an index tracker if you’re willing to take the risks and invest. The most established fund and most easily accessed is VinaCapital’s London-listed investment trust Vietnam Opportunity Fund (LSE: VOF).
This has had some issues in recent years, but it’s been tightening up its portfolio and exiting some private property investments with decent returns. This should help give it greater focus and enable the managers to close the discount to book value, which is running at between 20% and 25%. It’s recently started trading on the main London market, which should make it eligible for inclusion in the FTSE All Share index.
A rival to the establishment
However, the Vietnam Opportunity Fund might soon get some serious competition from a new launch by Saigon Securities Asset Management, a local specialist asset manager. In its home market, this firm runs the very successful Sustainable Competitive Advantage Fund, which is up by 14% since launch 18 months ago. The firm now plans to launch a fund called the Vietnam Value Income and Growth Fund, which should soon be available on most UK fund platforms.
This should be an interesting vehicle for some contrarian, value plays. Obviously, investing in smaller value-orientated stocks comes with many risks. They can be less liquid and more volatile than larger ones. Those corporate governance issues I mentioned earlier are often a major issue with smaller companies.
And the macroeconomic risks remain high: if the global economy were to tumble into recession there is a good chance that investors could flock from frontier investments in droves. What’s more, the fund will be very small when it launches. However, I think it might be worth a punt for adventurous types.
One of the complications of investing in Vietnam is that the index is dominated by a handful of stocks which tend to trade on high PEs and multiples of book value. The largest company, Vinnamilk, may be a good company but it trades at eight times book value.
Also, ETFs may not be the best approach for such a frontier market. The leading ETF is concentrated with 50% in just four stocks and 65% in financials. The top holding (15%) is Vingroup, a real estate developer, with a price/earnings ratio of 71!
Saigon Securities’ new fund strategy is large and mid-cap but “value” focused. The metrics of the planned portfolio are price/book of1.5 times and price/earnings of nine times, return on equity of 19 times and, for those interested in income, there is a dividend yield of over 5%.
More information on Saigon Securities here.