The Vietnamese stock market

Thesis:

• Vietnamese stock market had a large correction since April 2018. Country has had a very strong GDP growth. Possible continuation of rally, although negatively correlated with US-China trade war.

Trade:

• Buy VanEck Vectors Vietnam ETF (VNM). Experienced a 19.2% decline since early April 2018, mirroring the decline in the MVIS Vietnam Index.

Key follow-ups:

• Track how global trade war affects Vietnamese exports.

• Track FDI and the Vietnamese real estate market.

• Take a view on the valuations of the largest components of the MVIS Vietnam Index.

• Understand how often the components of the MVIS Vietnam Index can change.

Against thesis:

• In the region, Vietnam has the highest ratio of exports to GDP (over 100%). Thus a continuation of the trade war between China and US will likely damage the economy. Emerging markets have suffered since April 2018 when the US imposed tariffs on steel and aluminum imports from China. US represents more than 20% of Vietnam's exports. The Vietnamese government has forecast a slowdown in exports in H2 2018.

• Vietnamese stock index is dominated by a few large caps that have had substantial stock rallies in 2017. Perhaps those large caps are still overvalued (TBD). Possibility that ETFs (with exposure to Vietnam) do not have so much exposure to medium and small caps.

• Vietnam's growth is reliant on FDI. South Korea, who has been experiencing an economic slowdown, accounts for the biggest proportion of FDI (33%) in the country. Shipments by Samsung Electronics from Vietnam account for 1/4 of Vietnam's exports.

• 12% of the MVIS Vietnam Index is exposure to South Korea. The Korean economy has struggled in 2018.

• Government budget deficit has expanded in the recent years and the government is looking to reduce the deficit to 3.5% of GDP by 2020. The budget deficit forecast for 2017–2018 is about 5.8% of GDP per annum.

In favour of thesis:

• Since June 8 2018, VND depreciated against dollar from 22,800 to 23,200, which will help Vietnamese exports.

• Inflation has been increasing since April 2018, thus contributing to currency depreciation.

• Central bank interest rate is relatively stable at around 6%.

• Consumer lending is growing rapidly and is expected to continue to grow. However, NPL ratio is also high (close to 9%) - central bank is focused on reducing this ratio.

• The two biggest components of the MVIS Vietnam Index are the No Va Land Investment Group Corporation and the Vingroup (9% and 8.4% of the Index, respectively). Thus, a big component of the Index's performance is tied with the Vietnamese property market. The real estate market (both commercial and residential) has had a strong performance (in terms of demand, occupancy rates, and prices) and it is expected to continue in 2018.

• The government intends to privatise several state owned companies, which will help fight the budget deficit. However, speed of privatisations has been historically slow.

• The credit rating of the Vietnamese government has a stable outlook with Fitch/Moody's/S&P. But the country is still rated below investment grade.

• Government is very focused on maintaining exports level. Samsung Electronics, which accounts for a large proportion of Vietnam's exports, has had strong revenue growth in H1 2018.

Useful quotes:

"large moves by a few companies can swing the broader market big-time and currently five big companies are contributing to more than 40 percent of HOSE, namely real estate conglomerate Vingroup and its residential property development unit Vinhomes, dairy giant Vinamilk, the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) and PetroVietnam Gas Corporation, or PVGas."

"Foreign investors made more than $1 billion in net purchases last year, the highest figure in five years, and they are likely to stick around for more privatization of public giants."

"Investors are beginning to question if Vietnam’s stock market can replicate the 48 per cent growth registered last year after it lost 12 per cent in April – its worst monthly performance this year – despite a roaring economy and IPO market. Vietnam’s first-quarter GDP growth hit 7.4 per cent, the highest in a decade."

"Andreas Vogelsanger, chief executive of Asia Frontier Capital (Vietnam), said the high valuations of Vietnamese stocks are a legitimate concern, but that might well be limited to the top 12 to 14 index heavyweights. He still sees value from mid- to small-cap stocks, which are trading at 9.5 times trailing PE and a dividend yield of 7 per cent."

"With the market expected to grow 29 percent annually to VND 1 quadrillion (US$ 44 billion) by 2020, Vietnamese banks are planning to set up consumer finance divisions to increase their market share in the sector."

"In 2017, the consumer lending market grew by 65 percent compared to 50.2 percent in 2016."

"International Monetary Fund statistics show that the government budget deficit had increased from 22.1 trillion dong, or 5% of gross domestic product (GDP), in 2000 to 293 trillion dong (US$13.1 billion), or 6.5% of GDP, in 2016. The government aims to reduce the budget deficit to 3.5% of GDP by 2020, according to the Medium-Term Fiscal Plan 2016–2020."

"Vietnam’s total public debt as of mid-July 2017 was US$94.6 billion, or about US$1,038 per capita. The public debt has consistently increased over many years from 36% of GDP in 2001 to about 62.4% in 2016. According to an IMF forecast, it will be about 63.3% and 64.3% in 2017 and 2018, respectively, while the public debt ceiling is set by the government at 65% of GDP for 2020."

"Exports, which accounted for 102 per cent of gross domestic product in 2017, are holding up. They gained 16 per cent in January to June from a year ago, outperforming those in Singapore and the Philippines."

Websites for quotes:

https://www.bloomberg.com/news/articles/2018-05-24/vietnam-s-stock-market-crash-is-a-buying-opportunity

https://e.vnexpress.net/news/business/markets/vietnam-s-stock-market-loses-all-of-its-2018-gains-3754699.html

http://www.vietnam-briefing.com/news/thriving-consumer-lending-market-vietnam.html/

https://www.hkbav.org/uploads/Promotion%20news/59291120_2018%20Q1%20Vietnam%20Property%20Market%20Brief%20-%20EN.pdf

https://www.straitstimes.com/asia/se-asia/vietnam-goes-on-the-defence-as-china-and-us-clash-on-trade