Emerging Markets’ Loss Vietnam’s Gain
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The VN Index has risen 34% so far this year. With that increase there has been a significant flow of funds into the various funds and ETFs focused on Vietnam. This has been happening at a more consistent rate than those funds covering countries like China and Thailand. According to a recent article at Bloomberg more than $91 million has flowed into Vietnamese funds this year. Alot of that has moved into the Market Vectors Vietnam Index EFT (NYSEMKT: VNM) since March 2nd alone.
VNM saw a $7.4 million increase in AUM last week which ran against the grain for emerging markets in general. The iShares MSCI Emerging Markets Index Fund (NYSEMKT: EEM) with an AUM of $38.4 billion saw $685 million flow out last week, or a 1.7% decrease. The $6.23 billion iShares FTSE China 25 Index Fund (NYSEMKT: FXI) contracted by 1.2% last week. Worries over China’s property market and the deteriorating numbers coming out of Europe has investors spooked on China’s short term prospects of being able to offset lost European exports with higher domestic consumption.
Investment in emerging markets got off to a great start in 2012, buoyed by the U.S. equity rally, and investors believing the thesis of a U.S. recovery fueling a new round of increased consumption. $14.6 billion flowed into emerging market funds in January and February. But March saw a net outflow of $1.0 billion after China guided their 2012 GDP projections down, the U.S. economic data missed expectations on all fronts and the Federal Reserve’s hawkish posturing punctured the party balloon of U.S. equity bulls. This has seen a retrenchment on the part of emerging market investors as now the spectre of Europe’s banking realities continue to push money into risk-off assets.
I have been saying all year that the key to looking at Southeast Asia in the medium and longer terms is via increased regional growth, especially within the ASEAN+3 block, not in continuing to focus on the U.S. and European prospects. The region is putting its money where its rhetoric is because they can read a balance sheet as well as any gold bug can.
Foreign investment is flowing back into Vietnam as the economic data coming out of the country is very encouraging. The economy seems to have turned the corner after draconian central bank policy. Frankly very much needed at the time, this policy cut off the flow of credit for more than a year culminating in a slight contraction of total bank credit in 1Q 2012, -1.96%. This has wrung CPI inflation nearly completely out of the current economy while putting tremendous pressure on weaker banks and companies to restructure, merge, or face liquidation.
While the trailing 12 month CPI is still being quoted at 14.15%, the number for March was just 0.16%, or 2.9% annualized, and April’s number, despite a 5-15% hike in energy and electricity prices in March, is estimated to be similar. This would put the current CPI at well less than 3%; allowing the central bank to loosen monetary policy slightly and boost foreign exchange reserves, which have risen more than 50% in the past 9 months. The country posted its first trade surplus, 0.7% of GDP, in three years in Q1.
What has been most impressive about the rise in foreign investment has been how it has outstripped even the rise in the price of the VN and large-cap VN 30 Indices. Since March 2nd, the AUM of VNM has risen 10% faster than the either index. In other words, higher prices are attracting buyers faster than the indexes are rising; signaling that investors still feel there is value to be found in Vietnam’s equities.
The change in strategy for China to begin moving towards more domestic consumption, in a sense, finding occupiers for all of those under-sold/under-rented buildings, is leading to increased direct investment in their neighbors both to the North and South. China’s investments in infrastructure in Myanmar and Cambodia have been massive compared to those two countries’ economies. Vietnam has been the recipient of greater trade with China, especially in rice exports.
Couple this with Japan having begun a round of external investment in the region as they attempt to stave off the after-effects of Fukishima and their combined debt and demographics time-bombs. Vietnam’s oil exports to Japan are up 600% year over year while direct investment more than doubled in 2011 versus 2010 at more than $1.8 billion. This trend is accelerating. In the first quarter of 2012 Japan invested $2.3 billion in Vietnam.
Even with a 34% move this year, the VN Index is still trading at a multiple of 11. It is very possible given the macroeconomic forces in play that the multiple can expand to 15 over the medium term as capital flows to where it will be treated well.
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