Vietnam: There s No Contagion Here

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1 Market Commentary October 9, 218 Vietnam: There s No Contagion Here Emerging and frontier markets have had a rough ride in 218, victims of what has almost been a perfect storm of factors: a trade war between the US-China (as well as the US s trade conflicts with other countries); a strengthening dollar (which has affected trade as well as debt); and in some countries, political instability. Over the past few months, the international business news media has published one article after another about an emerging market crisis and the fear of a contagion Index spreading from a handful of countries to other markets. Turkey, Argentina, Brazil and Pakistan have all experienced significant economic and political turmoil, while regional peers have also seen their share of economic and political challenges. As one of the larger frontier markets (and an aspirational emerging market) Vietnam was unable to escape this broad sell-off. YTD Performance (USD terms) MSCI Emerging Markets -9.4% MSCI Frontier Markets -1.27% VN Index +.63%. Jan 1 Sep 3, 218 The fact is, however, that Vietnam is far better positioned than its frontier market peers across a range of key factors and was caught up in the ensuing selling frenzy. Consider the following criteria: GDP Growth Vietnam s estimated GDP growth in Q3 218 was 6.88 percent year-over-year, while for the nine months of 218, GDP growth is estimated at 6.98%. These figures put Vietnam on track to post 218 full year GDP growth exceeding 6.8%, provided Q4 does not present any surprises GDP Growth Source: World Bank Inflation Vietnam s inflation rate has been a manageable 3-4%. The government aims to keep inflation at below 4% Inflation

2 Fiscal Deficit The Vietnamese government s balance of accounts is in better shape than many of those in the comparison group Fiscal balance/gdp Trade Balance Vietnam has run a trade surplus for three of the past four years. In 217, the trade surplus was USD2.1 billion. During the nine months of 218, the surplus stood at more than USD billion, driven by the export of higher value goods such as mobile phones and other electronics. 1% 1% % % -% -1% -1% Trade Balance % of GDP (217) Source: World Bank Stock Market Performance Market cap (USD bn) 218 P/E Est. 218 EPS Growth % YTD returns % (USD terms) Vietnam VNINDEX Index Thailand SET Index Indonesia JCI Index Malaysia FBMKLCI Index Philippines PCOMP Index Turkey XU1 Index Argentina MERVAL Index Brazil IBOV Index Pakistan KSE1 Index As of September 3,

3 The first quarter of 218 saw the VN Index rank as the world s best performing stock market, up 19%, after coming off a stellar 217, during which it rose 48%. All of the first quarter s gains were erased by the beginning of the third quarter of 218, with the VN Index even falling into negative territory for a period. August and September, however, saw the VN Index return to positive territory, although it remains to be seen whether that trend will continue for the remainder of the year. Foreign Stock Trading Vietnam is the only country of the comparison group in which foreign investors have been net buyers of stock in 218 as of September 3, 218. Foreign flows YTD (USD bn) Vietnam Thailand Indonesia Malaysia Philippines Turkey Argentina Brazil Pakistan na -.9 na Credit Default Swap Jan 1 Sep 3, Year CDS spreads (bps) Malaysia Indonesia Thailand Vietnam Turkey Pakistan Philippines Argentina Brazil The risk of Vietnam as expressed through the credit default swap is still relatively low compared to other countries at 13 bps versus an average of 3 bps. -Year Bond Yields The yield on Vietnam s five-year bonds is among the lowest, meaning that inflation is under control and it is less expensive for the government to raise money. In August, Moody s upgraded Vietnam s sovereign rating to Ba3. Yield (%) Vietnam 4.46 Brazil 1.98 Indonesia 8. Malaysia 3.7 Argentina 31.9* Pakistan 9.6 Philippines 6.86 Thailand 2.34 Turkey 2.7 * Four-year bond. As of September 28,

4 Currency Depreciation The VND has fared better than many other currencies, thanks to supportive policies from the State Bank of Vietnam and strong FDI inflows. The Takeaways Country Depreciation vs. USD YTD Argentina % -17.3% Brazil -22.3% -1.8% Indonesia -9.9% -.6% Malaysia -2.3% 9.8% Pakistan -11.3% -6.1% Philippines -8.4% -.% Thailand.8% 9.1% Turkey -9.4% -7.8% Vietnam -2.7%.3% Depreciation vs. USD 217 As of September 3, 218. Although the period of April to early August saw Vietnam s stock market declined in line with other frontier and emerging markets one of the few downsides of having a larger, more liquid stock market that attracts foreign investors the fact is that many of the issues that caused certain countries markets to fall are not applicable to Vietnam. Its economy continues to grow sustainably, and the government is focused on making reforms that fuel continued growth. Nevertheless, we expect to see continued market volatility so long as the US-China trade war continues, the dollar continues to show some strength, and US interest rates rise. Regardless, nothing about Vietnam s macroeconomic situation has fundamentally change for the negative over the past nine months in fact, a number of key metrics have only become stronger, such as GDP growth, manufacturing, and exports, which were up 1% yoy. For the nine months of 218, Vietnam s trade surplus stood at USD.4 billion. Meanwhile, foreign direct investment continues to be robust. For the nine months of 218, registered FDI reached USD2 billion while disbursed FDI increased 6% yoy to USD13 billion, playing a role in helping the VND to remain relatively stable especially compared to regional peers. Significant FDI inflows are expected to continue for at least the next five years, according to the World Bank, and it is easy to see why: with labor costs one-half to two-thirds lower than those in China, as well as geographic proximity to supply chains, Vietnam is likely to bolster its position as a significant manufacturing hub in the region. To that point, as we detailed in a previous note, we believe that unlike many other developing markets, Vietnam could actually benefit if the US-China trade war continues for some period of time. Two other issues in which Vietnam fares better than other frontier and emerging markets are energy imports Vietnam s net energy imports are 1-2% of GDP, while the Philippines energy imports are approximately % of GDP and current accounts; Vietnam has run current account surpluses each year during the period F, while other countries run current account deficits. Finally, Vietnam has a degree of political stability its regional peers do not. Malaysia has undergone an historic election, while Indonesia will see a presidential election in early 219. Meanwhile, Thailand s military government s commitment to holding elections next year is viewed with some degree of skepticism, while the Philippines president s erratic behavior has caused a degree of concern about the country s direction, especially among international investors. By contrast, Vietnam s one-party state brings a level of predictability favored by businesses, no doubt a factor behind continued strong FDI growth. In terms of ongoing risks, continued hikes in US interest rates could have a knock-on effect globally. Meanwhile, there is a small-but-growing view among analysts and observers that China s GDP 4

5 growth could slow significantly due to the ongoing trade war as well as internal economic issues coming to a head. This would obviously affect markets around the region and world, and Vietnam would certainly see some impact. Although Vietnam s stock market has recovered some ground in August and September, we expect some degree of volatility for the foreseeable future. This does not, however, change our strategy to investing. We continue to take a bottom-up approach with a view toward the mid- and longer-terms vis-à-vis listed equities. Market dips can present buying opportunities in some stocks, and some of our funds have availed themselves of these opportunities over the past few months. In terms of private equity, the more volatile market presents an opportunity to invest in private companies who might have gone public if the stock market was more stable and/or rising. These private opportunities, which also include private investment in public equities and equitizations (should those resume), still offer some of the most attractive investment prospects for our flagship fund VOF. As further testament to the strong economy, the tech startup scene is burgeoning, and we have formed our VinaCapital Ventures technology holding company to participate in this exciting space. Regardless of what happens in the stock market in the short-run, we remain bullish about the opportunities we continue to see in Vietnam. Disclaimer 218 VinaCapital Group (VCG). All rights reserved. This report has been prepared and is being issued by VCG or one of its affiliates for distribution in Vietnam and overseas. The information herein is based on public sources believed to be reliable. With the exception of information about VCG, VCG makes no representation about the accuracy of such information. Opinions, estimates and projections expressed in this report represent the current views of the author at the date of publication only. They do not necessarily reflect the opinions of VCG and are subject to change without notice. VCG has no obligation to update, amend or in any way modify this report or otherwise notify a reader thereof in the event that any of the subject matter or opinion, projection or estimate contained within it changes or becomes inaccurate. Neither the information nor any opinion expressed in this report constitutes an offer, or an invitation to make an offer, to buy or to sell any securities or any option, futures, or other derivative instruments in any jurisdiction. Nor should it be construed as an advertisement for any financial instruments. Officers of VCG may have a financial interest in securities mentioned in this report or in related instruments. This research report is prepared for general circulation and for general information only. It does not have regard to the specific investment objectives, financial situation or particular needs of any person who may receive or read this report. Investors should note that the prices of securities fluctuate and may rise and fall. Past performance, if any, is no guide to the future. Any financial instruments discussed in this report may not be suitable for all investors. Investors must make their own financial decisions based on their independent financial advisors as they believe necessary and based on their particular financial situation and investment objectives. This report may not be copied, reproduced, published, or redistributed by any person for any purpose without the express permission of VCG in writing. Please cite sources when quoting.