Vietnam may be a star economic performer among the nations of Southeast Asia, but for stock market investors – foreign ones in particular – it has been an easy way to lose money. Could that be about to change?
At first glance, the market has been dull rather than disastrous. The Ho Chi Minh index is up 21 percent over the past five years or almost flat in terms of US dollars. The past year has seen a 6 percent rise despite the general weakness of emerging markets and meanwhile the dong has been stable on a trade-weighted basis.
But for many foreign portfolio investors the picture has been much worse. The US-dollar denominated New York Market Vectors Vietnam ETF (Exchange Traded Fund) is down 45 percent since 2010 and 21 percent on a year ago. The Hong Kong listed DB X-trackers Vietnam fund now trades at a mere HK$171 compared with over HK$400 around the time of its 2009 launch.
The fundamental problem of these ETFs is that they are supposed to track the market but in practice are unable to do so because so many of the leading companies are already at their foreign ownership limits. Other funds have been successful partly through having acquired their stakes earlier and partly by investing being able to buy into companies at the time of privatisation rather than having to wait until listing.
For instance, the closed-end Vietnam Enterprise Investment Ltd, run by Dragon Capital, originator of the first Vietnam fund, takes up such offerings available at auctions. It can also use leverage. Like other closed-end funds this trades at a discount to net asset value – now around 17 percent – but it has by and large at least kept pace with the HCM index.
The HCM market thus faces the problem of foreign ownership limits and generally low turnover. The Hanoi exchange has more listings but most are tiny and turnover less than one third of HCM. Combined market capitalization is around US$65 billion or a lowly 30 percent of GDP, held back by slow progress in bringing privatized companies to the market and by the debt levels which still overhang both banks and many state enterprises.
Turnover is weak due to both the foreign restrictions and lack of public participation in the market.
However, there are some encouraging signs of development. Companies themselves – banks and other businesses viewed as of strategic interest – are being allowed to set their own foreign limits if their own articles and other laws allow. So far only one has done so but there are reports that one of the largest, Vinamilk, which currently adheres to the standard 49 percent limit, may do the same.
Even without widespread foreign limit liberalization, there is also the prospect of the issue of non-voting depository receipts, enabling foreigners to participate financially without gaining control. Meanwhile there has been a surge of activity at auctions and in the unlisted market which augurs well for future listings. However, cleaning up of state enterprises and speeding up of privatisations however continues to be slower than desirable.
Also in prospect is merger of the two exchanges. The former head of the Hanoi exchange is now in charge of the Ho Chi Minh market and many expect him not only to see the benefit of a single, larger market but to be able to push it forward.
The past year has seen the HCM index performing well considering the negative impact of the oil price and some other commodity prices, the non-performing loan problems of the banks, and continuing weakness in some of the property sector. Drought and a fall in tourism from China also hurt. Overall earnings fell in 2015.
However, 2016 promises solid earnings growth. Lesser known companies sell on low price/earnings ratios which could rise sharply with more foreign investment. Manufacturing investment, which drove GDP growth of 6.7 percent in 2015, remains strong – a contrast to much of the region. Vietnam is perceived to have achieved fiscal and currency stability and low inflation. After painful experiences it will now not wish to shed those gains in pursuit of faster short term growth.
Initial concern that the removal of Nguyen Tan Dung as prime minister by the party in January and the strengthening of the position of party boss Nguyen Phu Trong would slow economic liberalisation has faded. The Politburo is now dominated by technocrats and there is less concern about the impact of corruption than under the flamboyant Dung, who was also blamed for big losses by some state enterprises.
The economy could face new problems as a result of friction with China, and the promise of the Trans Pacific Partnership (TPP) which has helped spur foreign investment, may fade. But given an increasing labor force and rapid urbanization, steady 6 percent growth should be possible and combined with a more open and active stock market finally provide foreign portfolio investors with some cheer.