Viet Market Looking Good

Amid all the angst about so-called emerging markets over static exports, falling commodity prices, a rising dollar and the threat of higher interest rates on dollar debt one Asian country has gone largely unnoticed: Vietnam.

That may now change as the country takes a step closer to making its stock market more open to foreign investors.

Once a byword for booms, busts and a fast depreciating currency, Vietnam for the past two years has seen unaccustomed stability, even if at times investors have been unnerved by its responses to China’s aggression in the South China Sea. The dong, now at 21,800 to the US dollar, is barely 4 percent weaker than it was two years ago, a performance bettered in Asia only by China.

To some extent that has been rewarded with a 7 percent rise in the stock exchange index in the first half of 2015, helped by foreign inflows of about US$180 million. But the market still ranks among the cheapest in the world, selling on a price to earnings ratio of about 12.

Meanwhile the nation has continued to show exports growth despite the fall in prices of some of its commodities as manufactured exports continue rapid expansion thanks to rising costs in China and other east Asian exporters.

Trade growth could hit 10 percent this year and although a rise in the current account deficit is certain after two years when it has been very modest, it is not yet likely to undermine currency stability. US President Barack Obama has been granted fast-track negotiating ability by the US Congress to bargain for ratification of the TransPacific Partnership, the omnibus trade bill affecting 12 Pacific nations. Vietnam is one of the Asian nations that particularly believe its exports would benefit from final passage, however far distant that is in the future.

This sense of stability has made the government at last willing to allow limited increases in foreign ownership which can only have the effect of increasing foreign portfolio investment and, all other factors being equal, pushing up valuations of many companies.

On June 26, Prime Minister Nguyễn Tấn Dũng signed a decree which will go into effect in September which is designed to modify existing rules which limit foreign ownership to 49 percent, and just 30 percent for banks. Many major companies will not be impacted. The limits for banks stay at 30 percent. And levels for leading state enterprises in telecoms, airlines etc., which are subject to other national laws or involve international commitments, will be set on a case by case basis with a list of the restricted sector limits to be announced in due course. For companies whose businesses straddle both open and restricted sectors, the lower limit will apply.

But for the rest of the market, the 49 percent limit is removed altogether. That will not make much difference to the majority of stocks but it should to at least some of the 31 already hard up against the 49 percent ceiling and another 10 very close. Some of those are among the largest and the most sought after counters.

In practice there is unlikely to be a Big Bang in September, as details of restrictions may only emerge over a sustained period. But Vietnam is gradually on the way from being a midget market with a capitalization of about US$70 billion and daily turnover of around US$100 million to one eventually equivalent to the Philippines, which has a US$300 billion capitalization.

Corporate governance issues remain a problem, as do the debt levels of some state companies. However, reform at the typically moderate, consensus-driven pace of Vietnam is continuing and with it the ongoing partial privatization of state enterprises. Another government decree requires privatized companies to list on the exchange.

It remains to be seen quite how rapidly these decrees are implemented in practice and Vietnam is not immune from external shocks. Nonetheless, with GDP growth continuing at around 6 percent at a time when most of Southeast Asia is looking decidedly anemic, Vietnam could become the flavor of the year without, it is to be hoped, the damaging extreme boom and bust cycle of its first bull market.