Vietnam was the great emerging markets equity story of 2006 – so much so that there is increasing concern that a bubble is developing.
The country’s broader macroeconomic indicators look reasonably robust. GDP growth was up 8.8% year-on-year in the second half of 2006, compared to a 7.4% rise year-on-year in the first half, creating annual growth of 8.2%. Credit Suisse analyst Joseph Lau forecasts 9.2% for 2007; he also expects trend export growth to be 20% per year or better over the next few years.
FDI flows at the end of last year approached an annualized $7 billion, almost double the pace from 12 months previously, and inflation, while high with a 6.5% year-on-year rise in February, is under control. The country’s accession to the World Trade Organization (WTO) last year was also a significant step. “Vietnam’s expansion seems immune to the uncertainty afflicting the regional and global economy,” says Lau.
Stock control
That’s not the problem. The issue is the stock market, which went up over 150% last year and added another 40% in the first two months of 2007 before falling back from its highs. The combined market cap of the Hanoi and Ho Chi Minh City stock exchanges increased 15 times over in 2006, with 160 new listings, 106 of them in December alone, although many of them came from companies long listed on the more informal over-the-counter markets, moving across to the main boards in order to take advantage of a tax concession.
Global institutional funds, which have largely ignored Vietnam because of its modest capitalization, have taken note, with numerous new single-country funds appearing, among them JF Asset Management in Hong Kong, Prudential, DWS (on the Irish Stock Exchange, of all places) and Lion Capital Management in Singapore.
Sideways look
This renewed institutional interest has pushed the price earnings multiples in the Vietnam market up over 35 times 2007 earnings – and in the case of the largest stocks, those in which foreign investors are comfortable, the multiples are in some cases much higher. Vietcombank Securities says there are five stocks trading at over 100 times earnings. Net foreign buying on the Ho Chi Minh City exchange in January was around $700 million – higher than Taiwan, whose market cap is 40 times larger.
“All of us in Vietnam believe that the market is a bit bubbly, a bit hot,” says Don Lam, managing partner of VinaCapital, a Vietnamese investment bank and fund manager. “Most fund managers in Vietnam have put on hold their stock buying. We’re not selling either – most of us are medium- to long-term investors, but right now stocks are going sideways.”
Garry Evans, pan-Asian strategist for HSBC, was a vocal admirer of Vietnam last year, accompanying the government on presentation tours around Asia, but notably he has downgraded his recommendation now, removing his overweight position from it in March. “I don’t recommend people invest in Vietnam now,” he says.
But he also thinks the correction has started, with the market down 15% from the top, and he thinks that the high price earnings levels are broadly similar to those seen in Thailand in the early 1990s, when that country went through its own period of rapid growth.
Dominic Scriven, founder of Ho Chi Minh City fund manager Dragon Capital, says, “In the short term it’s got a bit overblown, but the medium term is still very solidly intact.” Can he find value? “If you charge in and buy a blue chip today on a six- to 12-month view, probably not. If you take a longer-term view than that, then yes.” Lam adds: “The overall macro picture is fantastic.”
Fund managers are eagerly awaiting a promised raft of privatizations this year. At one stage, as many as seven landmark government sales, worth $1 billion apiece, were being expected in the course of 2007; it’s unlikely now to be that many, but some significant listings will take place, among them Bao Viet Life Insurance, Vietcombank, Mekong Housing Bank and probably one of Vietnam’s mobile telecommunication companies. “The pipeline is there,” says Scriven. “It’s a little bit unpredictable, but it’s certainly there.”
There have been rumours that the government, central bank and state securities commission have been looking at ways to cool the ardour a little, among them controls on capital flows, different methods of regulation for foreign and local institutions, and taxation of securities investment. Nothing is yet formalized, and some feel that the state simply mentioned the idea of capital controls to cool the market without having any intention of implementing them.
“They sought the opinions of a lot of funds here,” says Lam. “Based on that, they decided it was not a good idea to implement capital controls. That shows the government knows a lot better on economic and investor sentiment than those in Thailand.”
Making life easier
New regulations are expected soon subsequent to Vietnam’s new securities law. “Every country has its version of QFII,” says Scriven, referring to the investment format that allows foreigners into the Chinese markets.
“This is likely to be Vietnam’s. It will involve some sort of oversight of the regulators on who is doing what, and is likely to involve having some form of local representation.”
Will it make it harder for foreign investors? “No, in some ways it will make it easier. It will clarify the ways people can come in.”
Limited companies
Another continuing debate is the future of Vietnam’s foreign ownership limits, which are 49% for most industries and 30% in sensitive ones, which include banks, the area many foreign investors are most interested in. Both listed private banks, ACB and Sacombank, have long since hit their limit. While WTO, among other things, will probably lead to the erosion of these limits, it is said within Vietnam that the ministry of investment and planning, ministry of finance and the state securities commission have differing views on what to do about it and when.
For the future, Vietnam will need to develop its debt markets, or its access to global markets, as a way of raising the funds needed for infrastructure development to accompany the country’s growth. Van Huong, director-general of the department of energy and petroleum at the ministry of industry, told a Euromoney conference in Hanoi earlier this year that Vietnam may need to spend as much as $80 billion by 2025 on power generation, transmission and distribution alone.
So far Vietnam has raised foreign currency just once, in a $750 million issue in October 2005. Electricity of Vietnam has approval to raise up to $500 million and will probably do so next year, while Vietnam Oil & Gas Group and Vietnam Airlines have both talked about international bond sales. BNP Paribas has said Vietnamese companies will sell at least $5 billion of debt in the next decade.