Last week’s anti-China riots in Vietnam spooked investors, rattled the stock exchanges, threatened foreign business deals, and ignited conversation about whether that the political and economic risks in that region outweigh the potential rewards. But where some see the unraveling of peaceful co-existence in Southeast Asia, others see a golden opportunity.
Are businesses and investors over-reacting? Consider some of the more encouraging news coming out of Vietnam this month:
- Samsung is going ahead with expansion of manufacturing in the northern provinces of Thai Nguyen and Bac Ninh. As a result, about 50% of its smart phones made globally will be made in Vietnam. Already, Samsung’s factory in Bac Ninh was one of its largest worldwide, and the company accounted for $24 billion in exports from Vietnam. The Thai Nguyen factory opened in March will employ 16,000 workers and produce eight million units per month.
The Saigon port welcomed the largest ship ever docked there, a 54,000 ton vessel able to navigate the river safely thanks to a mammoth dredging project that will allow ships of this size to save $500,000 a year in transit costs. The port projects moving 120-150 million tons by 2025.
The investment ministry unveiled a proposed law that will cut red tape and streamline foreign investment by eliminating certificates for many projects, simplifying procedures, ending favorable treatment of domestic investors, and improving transparency.
Foreign investors have been snapping up stocks that domestic investors are rushing to sell in an over-reaction to last week’s riots. Foreigners are taking advantage of sharp drop in the VN Index, which peaked at 610 points earlier this year and fell below 530 before climbing back to 544 today.
- McKinsey released a study concluding that ASEAN, composed of Vietnam and nine other countries, will be the world’s 4th largest economy in 2050.
Business is getting done in Vietnam. Opportunities abound. The ugly events of last week are not likely to lead to war in the South China Sea. More likely, they will turn out to have been an exchange of moves in a chess game of diplomacy that will help clarify the figurative boundaries between two of the world’s fastest growing economies.
Posted in Vietnam development
Tagged Vietnam business, Vietnam development, Vietnam diplomacy, Vietnam economy, Vietnam exports, Vietnam government, Vietnam infrastructure, Vietnam investing, Vietnam law, Vietnam manufacturing, Vietnam stock market, Vietnam Trade, Vietnam transportation, Vietnam workforce
One of the consequences of today’s crisis in Eastern Europe is the escalation of anxieties elsewhere in the world. The situation in Ukraine has reverberated at least two ways in faraway Vietnam: (1) disrupting economic stability, and (2) raising the spectre of armed conflict in Southeast Asia.
Vietnam’s stock market, world’s best performing in the first part of 2014, has been in a nosedive since the Ukraine crisis. That’s partly because of conflicting views within Vietnam’s ruling party about economic health of the country; but it also reflects concern about both fragile export markets in Europe and the reliability of Russia as a long-time economic and diplomatic ally.
Meanwhile, people who have been watching developments in the South China Sea are wondering if Vietnam is on a path to become China’s Ukraine. That’s not surprising considering the centuries of Chinese aggression toward its southern neighbor.
The latest Chinese assertiveness is its construction of an oil and gas exploration rig near the Vietnamese coast in South China (or East) Sea territory claimed by both nations. State-owned PetroVietnam asked China National Offshore Oil Corp. to remove the rig — situated 120 miles East of the Vietnamese coast and within what Vietnam considers its exclusive economic zone. China responded by repeatedly ramming Vietnamese military boats.
Until now, conflict between China and Vietnam in the sea has been limited mostly to verbal sparring over who owns the Paracel and Spratly Islands, and Chinese harassment of Vietnamese fishing fleets.
The latest dispute highlights the increasing potential for military aggression in Vietnam’s East Sea, as Southeast Asia worries about parallels between Eastern Europe and its own region of 600 million people.
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.
American news organizations like the Wall Street Journal and Bloomberg are reporting this week that Vietnam ended up with a better year economically than international analysts had expected. Meanwhile, investors who had more confidence in Vietnam have been rewarded with a 23% gain in stocks so far this year and 35% since last Dec. 1 — plus double-digit dividends for typical publicly traded companies.
With the focus on China and other challenged emerging markets, Vietnam has quietly strengthened its global economic positioning over the past few years. This year its stock index has outperformed all others in Southeast Asia as its GDP rose slightly more than 6% in the fourth quarter and 5.4% for the year — ahead of last year’s 5.25% and Bloomberg’s 5.3% projection.
The main drivers of Vietnam’s recovery are exports — up 15% and now equivalent to 75% of GDP — and foreign investment, up 10% to $11.5 billion this year. Pledged foreign direct investment was reported at $22 billion, up 55%.
Vietnam is expected to have a trade surplus of $863 million this year, up from $747 million last year. Government statisticians also say Vietnam’s inflation rate is down from 7% last year to 6% this year.
All of this suggests Vietnam is in a strong position to continue its determined and persistent march toward full economic development. The government aims for a modest and achievable GDP growth of 5.8%, which will likely reward foreign investors for a third straight year.
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.
The International Monetary Fund says Vietnam’s economy will grow significantly slower than expected this year and next because the government is dragging its feet on needed reforms. Vietnam may be falling into the dreaded middle-income trap that describes nations that pull themselves out of poverty but get stuck on the path to prosperity.
The IMF had projected 5.8% growth in Vietnam this year and 6.4% next year but now projects 5.2% for both years. That may not seem like a lot, but it’s IMF’s biggest reduction in Southeast Asian other than Singapore — and it represents a big change compared to the outlook five years ago when Vietnam’s economy was flying high.
Vietnam’s problem, the IMF says, is the country is moving too slowly on the reforms everybody knows are necessary — especially privatizing state-own companies, overhauling the financial system, and creating an asset management company to manage bad debt.
The country is said to be lacking clear action steps to get its economy back on track. The IMF says Vietnam needs to be decisive and accelerate banking and state-owned enterprise reforms.
Investors have been relatively patient so far, pushing the VN Index up 17% this year. But Vietnam’s opportunity to replicate the economic success of Asian predecessors Japan and South Korea seems to be slipping away.
Forbes names Vingroup’s Pham Nhat Vuong as the first Vietnamese citizen on its annual list of the world’s billionaires — three decades after communist Vietnam began free market reforms and 10 years after the Saigon stock exchnge opened. Forbes calls Vuong’s success a “triumph of capitalism,” but Vietnamese media suggest less conspicuous Vietnamese business leaders may be richer than Vuong.
Vuong ended 2012 holding just over $1 billion in stock; Forbes says he is worth $1.5 billion overall.
Government-owned Vietnamnet says Doan Nguyen Duc — whose company owns more than 100,000 acres of rubber trees, hydropower, real estate, and a football club, among other enterprises — was wealthier than Vuong two years ago before his holdings dropped in value.
And Vietnamnet points out Vietnam may have several other billionaires whose assets are hidden because their businesses aren’t publicly traded. Among them is Dao Hong Tuyen, owner of many private companies and real estate projects said to be worth a total of $2 billion.
Vuong, 44, owns the majority of Vingroup, the real estate firm responsible for some of Vietnam’s most spectacular and elegant developments.
It may seem remarkable that the country whose civil war was won by communists a generation ago has now produced a billionaire. But the real milestone may be that wealth in Vietnam has become sufficiently transparent that it is now possible, in some cases, to measure it.
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.