The Shifting Realities Of Vietnam
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Unknown to many investors Vietnam has been one of the great economic success stories of the past decade. The liberalizing of their economy has freed it to grow at a compounded rate of close to 7% since 2000. This year’s estimates are for GDP growth of 6.5% officially, though the Asia Development Bank recently said they estimate a 5.7% growth rate. Does this slowing growth of the past two years signal the end of the Vietnamese story? In my opinion the answer is, “No.”
Vietnam’s export market is dependent on its position as the world’s 2nd largest coffee producer, as well as exporting rubber, cashew, fish and garments. With pricing and supply problems after 2011’s flooding in Thailand, covered by the iShares MSCI Thailand Investable Market Index Fund (NYSEMKT: THD), Vietnam is poised to be the largest exporter of rice in 2012 as it expands into Hong Kong’s higher margin fragrant rice markets.
How We Got Here
Very accommodative monetary policy accelerated growth that eventually had to correct. Corrections are purgative and also painful. Vietnam is currently sorting through that pain. Inflation rose to 21% in early 2010-11 forcing a reversal of central bank policy and a more than 20% devaluation of the dong. Over-investment in building construction and certain industries as well as a ‘tiger chasing the tail’ strategy of many companies, wildly investing in the latest sector of high growth has created a mess in the large cap companies who have become conglomerates without focus, notably Hoang Anh Gia Lai who has their hands in everything from real estate and forestry to sugar and rubber plantations.
Market reality, though, forced the central bank to raise interest rates causing many of these conglomerates to begin divesting out of these non-core assets and streamline their businesses. In 2011 the VN Index lost 32.3% and more than 50% from the 2010 peak. This is what I meant by corrections being painful. While GDP growth is still positive it is in the context of Asia’s highest CPI inflation.
That discipline is bearing itself out now. We’re seeing a lot of M&A activity in the banking sector. Habubank was recently acquired by Saigon-Hanoi Bank. One of the biggest and most trusted retail banks, Sacombank, has been at the center of a complicated acquisition story involving two other major banks who want access to Sacombank’s less vulnerable loan portfolio and retail banking business. This story is a metaphor for the rest of Vietnam’s current state. We have seen much needed consolidation in the steel and fishing industries as well. The real estate market in the capitol of Hanoi and Ho Chi Minh City is slowly unwinding as rental rates fall and fallow buildings are being repurposed.
Where We’re Are
That’s the bad news. The good news is that it looks like the worst over. The Market Vector Vietnam ETF (NYSEMKT: VNM) which tracks the broader Vietnamese market is up 37.6% year-to-date and after a pause in March has rallied to a 10 month high. In a market like Vietnam nearly everyone is a momentum trader, as there are few professionals to provide natural contrarian discipline on the market. Good companies are thrown away in bear markets and bad companies are bought in bull markets. Corrections allow us to sift through and find the best ones at the best prices.
These extremes in sentiment are common in emerging markets, as expertise is obtained the hard way; for the entrepreneurs, the regulators and the legislators. Vietnam has just passed through the first full cycle of expansion that has been seen the world over a number of times. Malaysia, which is covered by the iShares MSCI Malaysia ETF (NYSEMKT: EWM) grew at an incredible 9+% from 1987 to 1999 and after a sharp 18 month correction grew at more than 7% until 2009 which they emerged from even faster.
Current inflation data dropped sharply in March and April’s looks to be muted. The State Bank of Vietnam is targeting a 10% CPI inflation rate in 2012 which looks achievable. They have begun lowering interest rates. This is a policy option not open to the U.S., the E.U. and Japan who are trapped at zero-bound interest rates protecting their insolvent banks; prolonging the agony.
After contracting in 2011, foreign investment in Vietnam is accelerating again. Japan and Korea are two countries that have a keen interest in expanding their relationship with Vietnam. In the wake of Fukishima, Japan needs to accelerate its plans to move manufacturing offshore where labor is cheaper. Vietnamese labor costs 3% of what it does in Japan. South Korea is looking at Vietnam’s rapidly increasing, young and urban middle class as a perfect vector for consumer discretionary and services growth. China views Vietnam as an important trading partner for needed commodities such as rice, coffee, rubber and oil.
Where We’re Going
These are all immediate issues. In the case of Vietnam’s story, like most of Southeast Asia, there are the forces of global capital flight from the West to the East; from London and New York to Hong Kong and Singapore. This capital is searching for a home to find the best yield. The coming Asian Economic Community and ASEAN’s plans for transportation and financial integration provides a backdrop for increased regional trade and less dependence on exports to North America and Europe.
Both Vietnam and Cambodia are entering the golden ratio of population demographics (2 workers for every dependent) which attracts capital from a generational perspective. South Korea passed through this phase and is reaping the benefits now. Mix that with geography that has made Vietnam a major trading hub of the Pacific Rim and a pro-growth government and you have a country whose economy will grow even if it does nearly everything wrong.
While everyone wants to buy low and sell high, very few have the courage to actually buy low. Buying is easy when everyone else is. Buying is hard when everyone else is selling, but that is where value is uncovered. . Another way to look at this is that you are either a contrarian or a victim. Vietnam is on very few investors’ reading lists at this point. It is just not a part of their investing reality, but it is a part of the real world.
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