Vietnamese authorities are disappointed by the results of this year’s initial public offerings of state-owned enterprises. The companies were able to sell only 27% (84 million) of the more than 300 million shares offered –and foreigners bought only 10 million. Proceeds totaled $49 million.
The lack of enthusiasm among investors is being attributed to the offerings being mostly companies doing public works business in the property sector that has experienced falling prices. Also, Vietnam’s economic recovery has been relatively weak so far, and the government is not expected to boost public works spending.
But that doesn’t explain why investors are repelled by Vietnam’s state-owned companies at the same time they have driven up Vietnam’s stock prices by nearly 20%.
The explanation may be simpler: The companies are pricing their shares higher than the market wants to pay for them.
Vietnam’s government will have more success privatizing their businesses once it fully accepts the way capitalism works. In capital markets, the government doesn’t get to decide how much a company is worth; the market does.
When Vietnam lowers its expectations in pricing its IPOs, the country will successfully sell shares in the 432 state-owned enterprises scheduled to be privatized by 2015.
The year 2014 — the year of the horse — has greeted investors with disappointing results worldwide so far. Today the Global Dow is down 1% (3% in Asia) amid anxiety about the collapse of emerging markets. But in Vietnam the surge continues.
Investors are placing bets on frontier markets — about 30 countries with relatively low capitalization and liquidity that are not yet considered emerging markets. The best performers among frontier markets (and also among all markets) are Argentina and Vietnam.
The VN Index is up 14% so far this year (as is Argentina’s primary index) on top of a 22% gain last year. After several years of economic turmoil, Vietnam has begun the year of the horse with a stronger economic footing that will help support high corporate dividends — for many companies in the range of 12% and above.
Vietnam, and the people who invest in Vietnam, are counting on the country’s continued development as a major exporter of raw materials as well as agricultural and consumer products. Vietnam achieved a favorable trade balance last year, and the surge in foreign investment that began in 2014 appears to be continuing.
Is there more room for growth in a frontier market that already increased 22% last year and another 14% in the first six weeks of 2014? The answer would be “Yes” if you consider the fact that the VN Index was 574 at today’s close; that’s 49% of Vietnam’s market high of 1174 established early in 2008.
Vietnam’s stock market is so small ($45 billion) that international publications like the Wall Street Journal don’t bother listing it. Meanwhile, the Vietnam index is Asia’s shining star for 2013 — up 26% so far this year, 10 percentage points more than any other Southeast Asian benchmark.
The rising Vietnam market is likely to continue, for reasons outlined over the past four years in the blog and one new reason: The Vietnamese are planning to let foreigners buy a larger share of their companies.
Foreign ownership of publicly traded companies is now limited to 49%, and the finance ministry is taking up a proposal this summer to increase the limit and help the foreign-investment-led rally continue. And there’s a lot of room to grow; the VN Index closed Thursday (June 6) at 520.9, still well below half of its all-time high of 1174 five years ago.
It remains to be seen what changes Vietnam’s government will make in foreign ownership limits, if any, but a positive impact on the public equity markets is likely.
Bloomberg reports international investors have bought $244 million of Vietnamese stocks so far this year, the most since 2008. The VN Index is now up 48% since the start of 2012 as Vietnam’s economic climate has brightened — although the country’s economic challenges are still causing many companies to post losses.
In addition to raising foreign ownership limits, Vietnam’s regulators are planning to merge the Hanoi and Ho Chi Minh City exchanges this year as well as add covered warrants, derivatives, and other products likely to spur investment.
Overall, Vietnam appears to be a good bet for foreign investors with the vision to explore one of the world’s most dynamic frontier markets when much of the international business media barely notices it exists.
Vietnam financial portal StoxPlus says more than a tenth of Vietnam’s publicly traded companies (60 of 500 reporting so far) announced losses in the first quarter of this year.
At this stage in Vietnam’s slow recovery, the losses are no surprise to investors, most of whom appear to be anticipating better results later this year. Vietnam’s leading stock index is up nearly 18% so far this year.
Small banks and securities companies have been hit hardest because of bad loans and less trading in the stock markets. Brokerage revenues for most securities firms shrank — Sacombank Securities (SBS) reporting losses of $700,000, Dong A Securities (DAS) $310,000), Vina Securities $250,000 and Maritime Bank Securities $250,000.
Vietnam’s fragile economy also has been hard on the construction industry, especially building material firms. For example, six of the seven businesses under the umbrella of the Viet Nam Glass and Ceramics Corp (Viglacera) reported losses.
Shipping has been another weak sector, with Viet Nam Ocean Shipping (VOS) reporting the worst results, a $4.6 million loss, but the tide will turn.
Investors large and small, and foreign as well as domestic, can buy and sell stock in hundreds of Vietnamese companies that are listed in two separate exchanges, one in Hanoi and one in Saigon. To trade individual stocks, foreign investors need to go to Vietnam, obtain an investment license, and establish a relationship with a brokerage and a bank to handle transactions.
However, there are too easy ways for foreigners to invest in Vietnam’s public equity markets without leaving their desktops or smartphones or traveling outside the office or home. Both involve purchase of funds traded on international markets, which can be accomplished in minutes online.
The funds are:
- VNM — Market Vectors Vietnam is an exchange traded fund incorporated in the US. The fund is designed to replicate the performance of Vietnam’s overall market, but at times has been overweighted with financial companies. It invests 80% of assets in securities that comprise its benchmark index.
- VCVOF — Vietnam Opportunity Fund is a thinly traded $672 million investment company incorporated in the Cayman Islands and actively managed by VinaCapital’s team of investment professionals based in Vietnam. The fund aims for capital appreciation and income by investing in listed and unlisted companies in Vietnam and, in some cases, elsewhere in Southeast Asia.
Like Vietnam itself, both funds had weak performance over the past three years, but both have been on a tear since late fall. VNM increased 36% over the past year and 42% in the past three months. VCVOF is up 39% over the past year and 25% since December 1.
Investors from around the world are betting 2013 will be a break-out year for Vietnam’s economy. Foreign capital largely accounts for the VN Index surging 17% so far this year — and 28% since December 1.
Vietnam’s 17% year-to-date growth dwarfs every stock index in the world except Argentina (also up 17%). Vietnam not only leads other bourses in Asia; it’s growth YTD is 10 percentage points higher than every country in the world except Switzerland (up 10% YTD), Portugal (11%) and Italy (10%).
Why is Vietnam the hottest investment destination at the moment? Partly because the country has stabilized after four rough years punctuated by a horrible 2012 in which banking crises and corruption scandals drove away investors, both domestic and international; and partly because Vietnam remains the world’s most attractive frontier market.
Despite the rapid rise in stock prices, Vietnam’s stock markets in Hanoi and Ho Chi Minh City appear to have plenty of room to grow. The VN Index closed at 484 today, a big increase so far in January, but it remains at a level representing just a fraction of its all-time high of 1174 six years ago. Moreover, even after the stock run-up, Vietnam’s overall P/E ratio is relatively low — just over 13, equal to China and Singapore and below Japan (28), Taiwan (23), India (17), South Korea (16), Thailand (18), and Malaysia (14).
There are easy ways to invest in Vietnam. This blog will post some of them later this week.
For the first time next week, Vietnam will allow international investors to establish 100% foreign-owned securities companies, which could significantly change the investment climate. Currently, 15 of the country’s 105 securities firms are mostly foreign-owned, primarily by Japanese, Malaysian, and Singaporean companies.
The new law that goes into effect Sept 15 says foreigners with two years’ experience running financial services in can establish 100% foreign owned securities companies. That should attract foreign capital because of differences between domestic and foreign business styles and culture.
International investors have been reluctant to plunge into Vietnamese public equities because:
- Vietnam’s stock market is small, with market capitalization about 1% the size of that in the US.
- Vietnam has too many securities companies, which means not all firms can sustain themselves without resorting to unethical practices.
- Regulatory and legal gaps that have led to lack of transparency, weak management and excessive speculation.
Laws like the new one that goes in effect next week will help change that dynamic.