Gun-Shy on Vietnam

08/25/2010 12:01 am EST


Andrew McHattie

Editor, Investment Trust Newsletter

Investors ambushed by a bear market are surrendering their fund shares at huge discounts, writes Andrew McHattie in the Investment Trust Newsletter.

Numis Securities think this could be a good time to take another look at Vietnam. They say that in 2006-2007 Vietnam was one of the best-performing stock markets in the world, and numerous closed-end funds were launched to provide access for foreign investors. At their peak, these funds were trading at huge premiums.

However, the euphoria proved short-lived, and in 2008 Vietnam was hit by a double crisis. First, it was forced to raise interest rates sharply to choke off a surge in inflation, and this was followed by the global credit crunch, which hit exports and foreign investment. Unsurprisingly, the country’s stock market fell sharply, and the impact for holders of closed-end funds was exacerbated by wide discounts. There was a bounce back during 2009 helped by a domestic economic stimulus package. However, foreign investors have been reluctant to venture back into the market and have focused their attention on China instead.

Numis argues that Vietnam remains one of the most promising countries in the world due to:

1. low labor costs and a young, growing workforce;
2. rising domestic consumption and an entrepreneurial culture;
3. political/religious stability and a commitment to open up the economy to foreign investment following World Trade Organization accession in 2007;
4. significant natural resources, including agriculture, timber, and oil, and
5. a strategic location near China and Japan that makes it suited as an export hub for a wide range of manufactured products.

In the short term, there are some concerns over a resurgence in inflation, as well as budget and trade deficits. However, the currency has stabilized in recent months, and the prospects for GDP growth remain strong, with growth of 6.5% predicted for 2010. Furthermore, Numis says equity markets look attractively valued, with a forward price/earnings ratio of around [ten times].

Closed-end funds investing in Vietnam remain firmly out of favor, and most are trading at discounts of 30% or more. Shareholders have suffered disappointing returns, as much of the money was raised close to the market’s peak. In the broker’s view, though, these funds are currently an extremely attractive way to invest in Vietnam: “Experience in other markets/asset classes suggests that discounts are likely to narrow rapidly once Vietnam comes back into favor with international investors.”

[Numis] favors VinaCapital Vietnam Opportunity Fund (London: VOF). By investing in a range of asset classes (equities, pre-listeds/OTC, private equity, and real estate), the fund provides much broader exposure than can be accessed purely through the stock market. 

In addition, Numis says: “We feel that there is significant potential for VOF to add value through exploiting the arbitrage between the OTC and listed market. VOF also has the advantage of being the largest, most liquid fund in the sector, with an average daily trading value of over US$1 million. In our view, the fund offers considerable value at its current discount of 40%.”

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