A cautious plus sign for Vietnam
Published: 11 August 2010
Challenges provide opportunities for careful stock pickers
Vietnam saw an initial surge of enthusiasm as the country opened up to the world through its doi moi ('renovation') economic reform programme in the mid-1980s. However, this gave way to some disappointment and caution as the country's regulators sought to become more adaptable to capitalist ways of looking at business.
"Vietnam is still developing," said Jacqueline Tse, HSBC's Global Research Equity Strategist, Asia-Pacific, "so great care is needed before putting money into local equities."
But while caution was required, the long-term view of Vietnamese equities was positive, she said.
Issues such as lack of transparency in financial data, timely transaction information and corporate governance may not inspire confidence. Local investors have advantages over their foreign counterparts as their local network is often the key source of information.
Because of the ripple effect, there will be more of a move out of China.
Confidence had been returning of late, but people were more careful, Ms Tse said. The country has two stockmarkets, Ho Chi Minh Stock Exchange and the Hanoi Stock Exchange. The Ho Chi Minh Exchange is the mainboard for equities. It has a total market cap of USD30 billion and a daily turnover of around USD100 million.
As might be expected, there is major investment from the United States in Vietnam – microchip maker Intel, for instance, has a large plant near Ho Chi Minh City in the south. But recession has cut back US investment, and Ms Tse said even the Ford Foundation, a major sponsor to improve local education, poverty and human rights, had closed its operations in Vietnam in 2009.
A jolt of liquidity would go a long way towards increasing foreign equity investors' faith. As Vietnam continues to emerge from its former Soviet-style state-owned past, more of the state industries need to go public. Poor market conditions in 2008 and 2009 prevented this, and currently there seem to be no timelines for further privatisations of state-owned entities.
The military's mobile telecom provider Viettel and Vietnam's largest commercial bank by assets – the Vietnam Bank for Agriculture and Rural Development, or Agribank – have both said they want to go public, but no schedule has been announced.
In any case, privatisations are not done in the same way as initial public offerings in the West. Usually, shares are issued to employees and traded over the counter before being allowed to move to the exchange's main board.
Over the past year or so, there have been many multimillion-dollar investments in Vietnam, including outsourcing by US software giant Microsoft, South Korea's iron and steel behemoth Posco and Taiwan's plastics and petrochemicals maker Formosa Group.
Labour disputes in China at electronics manufacturer Foxconn, and later at motor giants Honda and Toyota, has created a surge of interest in moving manufacturing to Vietnam. Ms Tse said "Because of the ripple effect, there will be more of a move out of China."
In contrast to China, the social situation in Vietnam has a long way to go before labour problems are likely to have a serious impact. Against that, Ms Tse stated that the physical infrastructure is not great, though authorities are pushing hard to counter this. "They're building roads and bridges," she said.
Labour costs in China, particularly in the south, have been rising so fast that some factory owners and operators want to move inland and west, in line with the official Chinese government intention to open up the west of the country to development. But this won't necessarily cut costs because of transportation expenses for materials inbound and for finished or part-finished goods outbound.
Our long-term view is very positive. Exports are good, and consumption is good at 66 per cent of GDP, which insulates them a bit from external problems.
This, Ms Tse claimed, was why a lot of manufacturers were moving to Vietnam to hedge risk, including Foxconn. Like many other factories, it is a Taiwanese company and Taiwan is the biggest single investor in Vietnam.
Vietnam has been making progress up the income ladder: the World Bank ranked it as a mid-income country in 2008, with a per capita income that had reached USD1,040. That was up from just USD375 in 1999 when it was classified as a low-income country – USD1,000 is the dividing line.
Vietnam has escaped the worst of the recession that has beset other parts of the world, particularly Europe and the United States. This is mostly because Vietnam deals in low-value exports that do not track the full amplitude of business cycles and thus meet demands that remain fairly stable – commodities, for instance.
Ms Tse stated that the long-term view is positive. However, she again underscored the need for caution, pointing out that Vietnamese equities have been trading at a price-earnings ratio of about 14, which is high, so investors must be selective – government monitoring has improved, but companies still need to adopt more transparency.
She said HSBC forecasts Vietnam to notch up 7.2 per cent GDP growth for 2010, which is at the high end of estimates for Asian countries in the same range, such as China and India.
Overall, she said: "Our long-term view is very positive. Exports are strong, and consumption is good at 66 per cent of the 2009 GDP, which insulates them a bit from external problems."
Now Vietnam needs to grow its markets, and investors should take care that valuations are fair. "Don't chase the market too much," Ms Tse said, because liquidity (and foreign exchange rates) might be a challenge when investors try to sell.
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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