Friday, April 10, 2015

Vietnam ETF: Battered . . . And Compelling

April 7, 2015
Easy money leads to easy gains. At least that’s the conclusion drawn after witnessing worldwide monetary stimulus programs that have pushed 17 different stock markets to new all-time highs in this year’s first quarter. Yet for countries that are not swept up in the global frenzy of rate cuts, central bank bond buying and “beggar thy neighbor” currency moves, there have been fewer reasons for investors to cheer.
Take Vietnam, for example. The Market Vectors Vietnam ETF (VNM) has fallen more than 13 percent year-to-date and roughly 25 percent over the past 12 months. Yet the current underperformance should spell long-term opportunity.
The Vietnamese economy grew nearly eight percent annually in the 2000’s, thanks to a rapid pace of reforms. Yet progress has stalled in recent years, pushing the economic growth rate to around five percent, or below the rate of its Far East peers. As a result, Vietnamese stocks have largely missed out on the global bull market of the past five years.
Yet a pronounced shift in policy plans in 2015 should help give the economy—and Vietnamese stocks—a fresh boost.
A key catalyst will be a stepped up pace of privatizations, which has slowed to a crawl in recent quarters. “Over the next six to nine months, investors will get a lot more clarity about which companies will be brought public,” says Nikhil Bhatnagar, vice president for Asian equities at Auerbach Grayson. “That should relieve investor concerns about the government’s commitment to privatization.”
The government has identified more than 500 candidates for initial public offerings, according to Amrita Nandakumar, ETF product manager at Market Vectors. “Some of those companies, in fields such as pharmaceuticals, could help bring greater diversity to our Market Vectors fund,” she says. The move won’t happen right away because the Market Vectors fund, which carries a 0.76 percent expense ratio, rebalances quarterly after the underlying index gets re-jiggered.
The current index weighting, which focuses on Vietnamese-listed companies (or companies that derive more than 50 percent of their revenue in the country), reflects the fact that Vietnam still lacks a homegrown industrial base. Many of its major factories are owned by American, European, Japanese and Chinese companies.
As a result, it is heavily weighted toward financial stocks (42 percent), while consumer stocks make up another 28 percent. Vietnam has been aiming to more aggressively develop its oil and gas reserves, and the energy sector comprises another 16 percent of the fund.
Stepping Out Of The Shadows
Although Vietnam toils in the shadow of bigger economies in Asia, it’s unwise to think of it as an economic also-ran. The country has a population of roughly 90 million and a median age just below 30, which compares favorably versus the rapidly aging societies of China and Japan with median ages of 37 and 46, respectively.
To capitalize on those strengths, Vietnam needs to develop a thriving middle class. And that starts with a well-educated workforce. Notably, the Program for International Student Development ranks Vietnam 17th in the world in terms of 10th grade reading, science and math skills, ahead of countries such as Australia, Austria and France.
“The country’s demographics, education and location (near key shipping lanes) are why companies such as Samsung and Intel are announcing major investments in the country,” says Darshan Bhatt, co-founder of Glovista, an emerging markets-focused investment firm with $1.1 billion in assets under management. He adds that as labor costs in China and elsewhere rapidly rise, Vietnam is attracting a surge in foreign direct investment.
Geopolitics are also heightening Vietnam’s appeal. “The country is about to receive a lot of developmental capital from Japan, which sees Vietnam as a counterweight to an increasingly aggressive China,” says Auerbach Grayson’s Bhatnagar.
Market Vectors’ Nandakumar also thinks that an expected ratification of the Trans-Pacific Partnership, which includes countries accounting for 40 percent of global gross domestic product, will serve as an economic catalyst. “It should provide a major export boost to Vietnam,” she says.
Still, a huge gap persists between Vietnam’s economic potential and its current global market status. “The market is very reasonably valued, but global investors are scared off by a lack of liquidity,” says Glovista’ s Bhatt. Yet he thinks the coming privatizations will be a panacea.

“The government’s move to open up many more sectors [to investment] is a clear positive––the liquidity picture is changing,” he says.
The fund’s valuation could be another positive for the fund. Nandakumar notes that the holdings in the Vietnam ETF are currently valued at 1.3 times book value, right near a five-year low and half the multiple sported by the Market Vectors Indonesia ETF (IDX).
Against that backdrop, the skies do appear bright for long-term investors. The Vietnamese economy is expected to grow more than 6 percent this year (the best showing since 2011), and the country’s privatization plans, rising domestic consumption and broadening trade agreements could help return the country to the leading edge of emerging-market economic growth.
For now, the Market Vectors Vietnam fund remains the only pure-play ETF for this economic up-and-comer.

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