Time for investors to give Vietnam another chance
Published: 16 December 2010
Market reforms and privatisation seen as catalysts
Foreign investors should take another look at Vietnam’s stock market, according to Jacqueline Tse, HSBC’s Global Research Equity Strategist, Asia-Pacific.
“There are a couple of reasons,” she said. “One, the economic factors are looking very strong, I think it will rebound quite strongly especially because of the middle class that’s holding up the economy very well.
“If you look at GDP components, 55 per cent of the GDP is prime consumption and 41 per cent of Vietnamese exports are the fundamental, stable goods like rice, fishery products and footwear. Those kind of insulate Vietnam from the uncertainty in the developed world and that’s why we think Vietnam is going to grow steadily in the next few years.”
In November, Ms Tse and Global Research Global Head of Equity Strategy Garry Evans co-authored an HSBC Global Research study on Vietnam. Ms Tse said Vietnam’s stock market has a better outlook than other ‘frontier’ markets such as Sri Lanka and Pakistan.
“Sri Lanka’s stock market has a market capitalisation of USD19 billion and that’s about half of Vietnam’s,” she said. “Pakistan is about the same size as Vietnam’s stock market but the liquidity is only about half Vietnam’s.
“And that’s the problem with frontier markets because there is no liquidity and foreign investors are often very concerned about that because if they slip on the position they don’t know how to get out.”
Vietnam has two stock markets: Ho Chi Minh Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX). HOSE was called the Ho Chi Minh City Securities Trading Center when it opened in 2000 as the country’s first stock market. It is the active equities trading market, with a total market cap of USD27 billion and a daily turnover of around USD48 million. NHX has a market cap of USD6 billion and daily turnover of USD28 million.
The market rose sharply after Vietnam’s 9th Party Congress in April 2001, when the Ho Chi Minh Index (VN Index) rose 176 per cent in the first half of the year. A sharp correction followed as liquidity dried up when the handful of companies reached the foreign ownership limit.
After several flat years, the index doubled in the first four months of 2006 after the 10th Party Congress followed by another correction but the country’s accession to the World Trade Organization (WTO) in January 2007 triggered a further round of enthusiasm.
Now, Ms Tse believes market reforms and privatisation will be the catalysts for the country’s stock market to revive in 2011 after the 11th Party Congress in January. She said foreign investors were finding it easier and getting less nervous about entering – or returning to – Vietnam.
There were two reasons, she said: “First of all, regulation-wise it is not that difficult. You need a custodian bank to help set up an onshore capital contribution account but it is not like there are a lot of restrictions to prevent you remitting the money. You just need to take the time to go over the process to set up the account properly.”
We see a turning point right now because valuation is getting cheap compared to other frontier markets.
The second point was whether the stock valuations were attractive.
“For that we see a turning point right now because valuation is getting cheap compared to other frontier markets,” Ms Tse said. “Vietnam is trading at about 10 times PE while the others are at least 10 times or more – it depends on which market you are looking at.”
Another factor was that two “catalysts” were coming up.
“First is the Party Congress coming up in January 2011,” she said. “If you look at some of the charts of the index for both of the Party Conferences in the past years – there was a rally right after the Party Conference so we think that should be the case again after the conference in January. So that is the shorter-term catalyst.
“The longer term catalyst is the resumption of ‘equitisation’, the process of converting state-owned enterprises into joint stock companies. We are expecting that the government will pick up equitisation again because the infrastructure is better now.
“They have a platform called Upcom. That trades privatised but unlisted stock so that brings it one step closer to being listed.
“The second thing is the state-owned enterprises. They have a more real reason for diversifying and selling off now. Before, they always counted on the state when they need money. If they run out of money they go to the state and ask for more. But now Vietnam has been running a budget deficit and a trade deficit for a long time. This is a good reason for them to look for other funding sources. So I think these are some of the longer-term catalysts that will support the market in future.”
However, Ms Tse warned that there was always a risk in Vietnam, just like other venture markets and investors should not regard it to be on a par with places such as Hong Kong or Singapore.
What we are telling investors is that valuation is getting attractive – there are catalysts in place but that doesn’t mean that there is no risk.
“What we are telling investors is that valuation is getting attractive – there are catalysts in place but that doesn’t mean that there is no risk,” she said. “So you need to understand the risk and take that into consideration when you look at returns.
“For example, transparency of the company and of government is still a problem. Corporate governance is still a problem. Foreign investors often find it difficult to get access to the company and that is why we recommend investors to stick with the very large cap stocks.”
Ms Tse said exchange-traded funds, especially those listed offshore, were a sensible option for foreign investors and several had shown a sharp pick up in value recently such as Vinacapital Vietnam, listed in London, and Trackers FTSE Vietnam, in Hong Kong. The average daily trading value for Vinacapital Vietnam rose 177 per cent between July and November while Trackers FTSE Vietnam (HK) was up 345 per cent in that period.
Investors in listed funds did not have to deal with setting up the account, she said, adding: “They don’t need to directly deal with corporate governance and individual companies. They have a fund manager to take care of that and they don’t need to deal with foreign currency risk.”
Ms Tse said the Index would probably go sideways for the next few months until after the Party Congress.
“We want investors to look into it early enough so they can still get decent exposure,” she said. “They should look into Vietnam and understand the risk first and, if they are comfortable with that, they can look into the Top 10 companies and see if there is stock available for foreign investors because we don’t expect a major correction between now and the Party Conference. So while the good ones are still available it doesn’t hurt to buy while supplies last.”
Jacqueline Tse
Jacqueline Tse joined HSBC in February 2008 as an Equity Strategist in Asia-Pacific. Previously, she worked at a US investment bank to manage its FX and liquidity risks in various Asian markets and also on the Economics team to oversee the Hong Kong market.
Before joining the banking sector, Ms Tse was the Senior Financial Analyst at Hewlett-Packard in Silicon Valley. She holds an MSc in Operations Research, focusing on Financial Engineering from Columbia University and a BA in Economics from the University of California, Berkeley.
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Dong depreciation
still a concern
A potential depreciation of the Vietnamese dong remains a concern, according to Jacqueline Tse, HSBC’s Global Research Equity Strategist, Asia-Pacific.
“Those types of policy changes usually come as a surprise to investors and that is one of the examples of why we are seeing no transparency of the government because people do not know when they are depreciating,” she said.
“Politics works quite differently in Vietnam. In other markets politicians want to do a lot of things that are market-friendly before a major congress or election but in Vietnam it is different because it is one party. Politicians stay low profile.
“They just want to make sure that they don’t make any mistake or attract any negative publicity. So that is why we expect the market to go sideways and there is unlikely to be any policy changes until then.”
Flexible government
shows open mind
Jacqueline Tse, HSBC’s Global Research Equity Strategist, Asia-Pacific, said the Vietnamese Government was not resistant to advice from outside the country.
“They are flexible in the way that they listen to foreign investors as well as a lot of international bodies like World Bank and Asian Development Bank,” she said. “They work with them very closely to learn how to manage the economy. They have a very open mind.”
Vietnam’s youthful population composition contrasted with the ageing population over the more developed markets in Asia, Ms Tse said, with 65 per cent of the population aged between 15 and 64. Another 25 per cent was aged 14 and below.
The combination of these factors with the forthcoming Party Congress, acceleration of equitisation, steady economic growth and reasonable valuation added up to a significant turning point, Ms Tse said.
“And on top of that, I think regulators are working more seriously in defining the law better so they can actually take action, for example insider trading – they will increase the penalty, make insider trading more actionable.
“Other market reform initiatives being considered are extending the trading hours; shortening the settlement times. Those are some of the things they are working on so it gives foreign investors more confidence to come back.”
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