Investors are attracted to the country’s ‘mini-China’ story, and with the macro-fundamentals looking stronger than a decade ago, Vietnam’s ‘frontier’ market could be upgraded.
Vietnam's stock exchange is still classified as a 'frontier'
market, but is one of the largest in this category with a market
capitalisation of about $140 billion. Its performance, powered by
foreign investors and fuelled by new listings, also makes it one of
the most exciting markets in the world, irrespective of its
categorisation.
The Ho Chi Minh Stock Exchange has been one of the world's best
performing bourses this year, surging about 17% in local currency
terms to 17 April, and the benchmark VN-Index has more than doubled
during the past two years.1
Investors are attracted to Vietnam's 'mini-China' story: that of
a communist state embracing the private economy, integrating itself
into the global trading system and setting itself up as a hub for
foreign manufacturing. Indeed, tensions between the US and China
have been helpful: both Korea and Japan have shifted a lot of
production to Vietnam, partly to diversify away from
China.2
Over the past decade, companies such as Intel and Samsung have
set up factories in Vietnam and are now contributing to its
improved trade balance. The latter makes about half its smartphones
there.
True, there is a danger that market valuations are looking rich,
but there is an underlying foundation for investors' optimism. The
Vietnamese economy, which nose-dived after a 2012 banking crisis
and a collapse in property prices, is in robust health, growing at
an annual rate of 7.4% in the first quarter of this year. And the
country's exports now exceed those of Indonesia - an economy almost
five times its size.3
The country also has a youthful population that is stimulating
consumption across all sectors of the economy, and encouraging
investors in new stock market listings being promoted by a
government that seems to favour the privatisation of some
state-owned enterprises (SOEs) and, crucially, the participation of
foreign investors.
Vietnam limits overseas ownership of non-banking stocks to a
maximum of 49%, and of banks to 30%, and there have been proposals
to introduce depositary receipts that would allow foreigners to buy
majority stakes in listed companies without voting rights.
Stock market frenzy
Since taking office in 2016, prime minister Nguyen Xuan Phuc's
administration has aimed to cut back the role of the SOEs that
dominated the economy, selling stakes in food and drink, oil and
power generation companies. In December 2017, a consortium led by
Thai Beverage bid $4.8 billion to buy a controlling stake in
Sabeco, the country's largest brewer, and last February the
government announced that it had set up a committee to oversee $220
billion-worth of state-owned assets as part of its plan to generate
half of its economic output from the private sector within two
years.4
Private companies that have listed since the start of 2017
include low-cost carrier VietJet Air, shopping mall manager Vincom
Retail, and refinery operator Binh Son.5 Singapore's
sovereign wealth fund, GIC, has agreed to spend about $850 million
for a 7.1% stake in luxury property developer Vinhomes in an
offering that would surpass a planned $922 million offering from
Techcombank, where GIC is again a cornerstone
investor.6
However, investors are less enthusiastic about privatisation
deals due to aggressive valuations. Vietnam Cable Television had to
cancel its stock market debut in early April after just one
investor turned up at the auction. Furthermore, state-owned
hydroelectric contractor Song Da is trading 28% below its December
IPO price and Power Generation Corporation 3 has traded at a 35%
discount since its February offering.7
In fact, high valuations in general could curb the stock
market's momentum. The 10 biggest stocks in the VN-Index are
trading on a weighted average of about 32 times 2018 projected
earnings,8 and the market has a recent history of boom
and bust. The Ho Chi Minh City exchange's bull run took a dramatic
dive after the 2008 financial crisis, as growth slowed and
inflation rose, with stock prices plummeting 80% over the next four
years.9
On the other hand, the macrofundamentals look stronger than a
decade ago, foreign companies are establishing manufacturing bases
with confidence and the Vietnamese government is encouraging
overseas investors. Vietnam's frontier market could well be on its
way to an upgrade in classification.
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Sources:
1 Financial Times, 17 April 2018.
2 Natixis, April 2018.
3 HSBC, April 2018.
4 Financial Times, 27 March 2018.
5 Financial Times, 17 April 2018.
6 Bloomberg, 18 April 2018.
7 Bloomberg, 18 April 2018.
8 PXP Vietnam Asset Management, April 2018.
9 Financial Times, 17 April 2018.