Dr. Doom tips Vietnam investments

Despite his reputation for gloomy predictions, Dr. Marc Faber provided a sterling recommendation
of Vietnam’s long-term investment potential - photo Le Toan

As the keynote speaker at the Vietnam Investment Forum 2014, co-organised by Vietnam Investment Review, HVS Vietnam Securities Co. and Hong Kong-based Asia Frontier Capital (AFC), the investment guru focused on global macro-economic trends and geopolitical as well as financial trends. He also analysed the Vietnamese stock market.

“Vietnamese work hard and they have ambitions. Investors like countries with highly ambitious people,” said Faber, chairman of both Indochina Capital and the Dragon Capital-managed Vietnam Growth Fund. The investment guru has been involved in Vietnam since the early 1990s when Indochina Capital built their first project at the Furama Resort in Danang. After selling this resort, the firm then built the nearby luxury Nam Hai retreat. Indochina Capital are also investors in the Hyatt Hotel in Danang.

Faber also tipped the Vietnamese stocks as a good bet, citing their 8 per cent rise this year despite tensions in the East Sea. He added that they had out-performed the S&P 500 in the US and the Russell 2000. However, Faber remained down-to-earth about prospects claiming he thought a significant growth in value was unlikely, but there was little significant downside risk. Faber added the market was now as strong as it had been in 2012 and 2013 and as of April this year, it was one of the best performing markets in the world.

Faber and leading foreign and Vietnamese experts skirted around the issue of whether the world economy had entered the terminal phase of a gigantic credit and asset bubble. Instead, the Swiss analyst who publishes the widely-read monthly investment newsletter, The Gloom Boom & Doom Report,  pointed out that universal problems affected both developed economies and emerging markets. He also stressed some of Vietnam’s strengths.

Vietnam has shown “stunning export performance,” Faber said. Since mid-2008, the export index of Vietnam has exceeded the average for emerging markets, and Vietnam’s export index now stood at about 270, almost double the emerging market average of 140.

Why Asian frontier markets?

Addressing about 500 attendees at the forum, Thomas Hugger, CEO of Asia Frontier Capital (AFC), said the first reason for increased interest in Asian frontier markets was the low correlation and diversification at attractive valuations.

Asian frontier markets offer attractive dividend yields and low price to earnings and price to book ratios, he said. “Asian frontier markets are attractively valued relative to emerging Asian countries.” For example, Vietnam’s VN Index as a frontier market has a dividend yield of 3.5 per cent. While among emerging markets, Thailand’s SET Index has a dividend yield of 3.2 per cent, Malaysia’s FBMKLCI Index scores 3.1 per cent, and India’s BSE SENSEX records a 1.4 per cent yield.

The second reason is the excellent upside potential due to high GDP growth. Hugger said a GDP growth of 6.4 per cent was expected in 2014 for the AFC frontier universe, consisting of Mongolia, Laos, Cambodia, Myanmar, Sri Lanka, Iraq, Papua New Guinea, Bangladesh, Vietnam, the Maldives and Pakistan.

The third reason is favourable demographics. Compared to developed markets, the AFC frontier universe has a much younger population increasing at a faster rate. This supports future economic growth and consumption.

The shift in manufacturing from China is another reason. The combination of young workforces and low wages is attracting manufacturing to Asian frontier countries as wages in China increase and the workforce gets greater employment opportunities, Hugger explained. “Bangladesh and Vietnam are good examples of the shift of manufacturing from China to neighbouring countries.”

Increasing consumption is luring investors to the frontier markets, he added. “Asian frontier consumer stocks are undervalued and have the potential to catch up with comparable emerging market valuations.” For Vietnam, Mongolia and Sri Lanka, the dividend yields from consumer food products are 6.2 per cent, 0.6 per cent and 1.5 per cent, respectively.

Why Vietnam?

VinaCapital Group founder and CEO Don Lam said Vietnam was already a destination for foreign capital flows.

He said foreign direct investment (FDI) commitments to Vietnam remained unchanged. The Ministry of Planning and Investment (MPI) announced disbursed FDI reached $4.6 billion during January-May, up 0.4 per cent year-on-year. 

As for portfolio investment, local participants in the Vietnamese equity markets drove the sell-off, said Lam. Foreign investors have been net buyers on the Ho Chi Minh Stock Exchange every day since April 18, the longest stretch of purchases since January, as valuations declined to a four-month low. They added about $108 million to their holdings even as the benchmark VN Index slumped 2.2 per cent.

The index has dropped 9 per cent from this year’s peak of 608 points on March 24. The gauge of Vietnam’s $52 billion stock market has a price-to-earnings ratio of 13.1, the lowest level on a weekly basis since January. That compares with a multiple of 14.8 for the MSCI Southeast Asia Index. But Lam noted that the VN Index was expected to reach 640 points for this year, up 10 per cent from February, and 27 per cent from December.

The VinaCapital CEO remarked that in an encouraging development for FDI inflows, the head of Samsung Global Strategy Group had announced that his company would make multi-billion dollar investments in Vietnam in areas other than cell phones and electronic equipment. It would diversify into the construction of thermal power plants, shipyards, airports, and petrochemical factories. Samsung was committed to making Vietnam its production hub in Asia with the capacity to supply half of global sales in cell phones.

“We project a GDP growth rate at 5.5-6 per cent for 2014,” Lam said.

New opportunities from stock market

State Securities Commission chairman Vu Bang said the number of investors in the Vietnamese stock market had increased from 3,000 accounts in 2000 to over 1.3 million accounts now, including 16,000 foreign investor accounts.

He added that Vietnam would issue a new law on securities in 2017 with a broader scope in line with international practice. All securities activities will be revised to make sure they were effectively linked with the financial market’s service sectors.

Vietnam is developing government, local and corporate bond markets, upgrading the government bond trading system via an online trading system and Bond Index, as well as connecting with Bloomberg. It is developing a corporate bond market via granting an issuance registration certificate prior to allowing the issuance of corporate bonds.

The country is also developing a standardised derivatives stock market. Bang said in the short term, derivative securities would be applied through the securities and bond indexes, but in the long term, all derivatives would be united with securities, goods and money under a single market.

Vietnam is building a shared set of indexes for the whole stock market including both stock exchanges in Hanoi and Ho Chi Minh City, and also building a set of bond indexes.