Manager View: Good Time To Have Dry Powder In Vietnam

Dec 18 2009 | 11:46am ET

By Louie Nguyen -- Vietnam’s economic growth accelerated this quarter, buoyed by domestic demand and government stimulus spending that has revived bank lending. Gross domestic product expanded 5.8% from a year earlier after gaining 4.5% in the previous three months, according to the General Statistics Office in Hanoi. For the first three quarters, the economy grew 4.6%, compared with a revised 6.3 % for the same period in 2008. Retail sales have maintained growth rates of about 20% through the economic slowdown. Industry and construction, which accounts for 40% of the Vietnamese economy, grew 4.5% in the first three quarters, with the construction sub-category alone expanding 9.7%.

The Ho Chi Minh Index had another strong quarter, up some 29%. This is partially explained by the continuing world equity rally. It also reflects, however, high levels of liquidity in the domestic Vietnamese market resulting from the government subsidized business loans leaking into the stock market. The State Bank of Vietnam has been pumping in cash with generous open-market operations, while banks and brokers have been weighing in with more margin products. For the moment there is no contradicting liquidity, the question is how long it will carry on.

Foreigners have been more consistently cautious than locals, being net sellers during the quarter. There’s a growing concern that the macro situation is deteriorating, prompting some foreign funds, especially regional ones, to withdraw from Vietnam and deploy capital in other cheaper countries. Citigroup announced during the quarter that foreign reserves have dwindled down to US$17 billion from US$23 billion a few months ago as trade deficit widens. $17 billion represents approximately 3.5 months of import coverage. If the foreign reserves continue to dwindle, supply of USD would become severely restricted. Growing concerns about inflation are also starting to be felt, which explains why the market has been talking about a possible VND devaluation and a possible interest rate hike by the State Bank of Vietnam by year end.

During the 3Q my colleagues and I attended a Vietnam investment conference in New York. The president of Vietnam, Nguyen Minh Triet, and a number of senior government officials were on hand to discuss the current state of the Vietnamese economy. While the speeches were long on platitudes and short on substance, we were nonetheless comforted by the fact that they were recognizing and addressing some key issues. The government is focusing more on boosting economic growth this year than on easing inflation, the Vietnamese president said. We did have productive conversations with a number of CEOs of Vietnamese private firms with intriguing expansion plans, including an Anheuser Busch distributor.

One of the big news items of the Q3 in Vietnam was the forced liquidation of the Indochina Vietnam Capital fund. We had long thought it likely the market correction would force some funds to liquidate. The market finally claimed its first victim. As Indochina was forced to liquidate its public holdings, we were able to accumulate shares at meaningful discount to our estimate of fair value. One example is Bao Viet Holdings, which provides life and non-life insurance services in Vietnam. It is one of the biggest insurance companies in the country, with about 5,000 employees and 34,000 agents. HSBC Insurance is a strategic investor. Bao Viet went public during Q2 for approximately 45,000 Dong and climbed as high as 53,000 Dong. We purchased the shares for approximately 35,000 Dong—near the all-time low.

Outside the top-10 by market capitalization valuations are selectively compelling and prospects for 2010 and beyond are encouraging. We continue to believe markets will be under pressure by year’s end. Short-term loans provided under the first loan-subsidy program form about half of the US$22 billion lent so far. With these loans expected to expire by year’s end, some air will come out of the equity market. In addition, sustained signs of economic failures in the US could affect sentiment in Vietnam as well.

The pullback should present some persuasive buying opportunities. Furthermore, more privatizations may be on the horizon now that the market has substantially come off the bottom. Lastly, there are rumors that the ‘big boys’ are coming to Viet Nam -- big as in Soros big. This is a good time to have dry powder in Viet Nam. 

Louie Nguyen, CFA, actively invests in Vietnamese companies. He is fluent in Vietnamese and is the CIO of San Diego-based Soledad Investment Management, which specializes in non-US investments. For more information, please contact cs@seacrestim.com


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