After expanding by about 7% a year between 1995 and 2008, growth in Vietnam has suffered a sharp slowdown. Exports tanked amid the global downturn just as monetary policy was being tightened to cool the overheating. GDP growth slid to an annual rate of 3.1% in the first quarter.
But now it is bouncing back, due largely to a China-style “government-orchestrated increase in commercial bank lending”, says Capital Economics. Credit growth jumped from an annual 10% in March to 24% in June. A fiscal stimulus worth 8% of GDP, one of the largest in Asia, and a cut in interest rates from 14% to 7% facilitated by a slide in inflation thanks to the slowdown, have also provided a fillip.
Industrial output and retail sales have stabilised, and a gradual improvement in global conditions should bolster exports and foreign direct investment, says Capital Economics. “Vietnam is back on track” and growth should rise to around 5% by the end of the year.
The small and volatile stockmarket has gained around 70% this year as the outlook has improved. But the momentum is set to slow now that loose fiscal and monetary policies are likely to be tightened gradually.
The central bank has said it wants to cap lending growth at 30% this year, so a lending slowdown is on the cards. “Surging bank credit has fuelled Vietnam’s rally since April” – the Ho Chi Minh Stock Exchange’s VN Index has almost doubled since then – “and we expect slowing bank credit to end Vietnam’s outperformance,” says Credit Suisse. In addition, rich valuations are another reason to take profits. Vietnam’s biggest stocks are on the second-highest price-to-book-value ratios in Asia ex-Japan.
The index as a whole is starting to look pricey at almost three times book value. While the regional stockmarket upswing looks set to continue for now, all emerging markets are vulnerable to a slide if global risk appetite falls again. The London-listed Vietnam Opportunity Fund (Aim: VOF), still on a 22% discount to net asset value, offers a cheaper bet for long-term investors than a punt on the index.