Equity strategy

Becoming investible
What would make 2009 better?
The Vietnamese market is becoming increasingly marginalised. In 2008, the VN Index was down 69% in US dollar terms, the worst performance of any Asian market. MSCI Asia ex Japan, by comparison, fell 53%. Neither did Vietnam share in the rebound in equity markets in the last six weeks of the year: while Asian equities rose 23% from 20 November to the end of the year, Vietnam actually fell by 3%. have been net sellers consistently since September (see Chart 3) and have sold a total of USD127m net over that time. The selling slowed in December but perhaps only because most foreign investors, except for specialist Vietnam country funds, have now sold out. The market’s largest IPO in the past 12 months, by Vietinbank on 25 December, was fully subscribed (just) but only three foreign institutions bid for shares. With this backdrop, in our latest Asia Insights Quarterly, we dropped to zero our small nonbenchmark recommended weighting in Vietnam. We take the view that, even when risk appetite does come back to global markets, there are other markets in Asia that look more attractive as a first entry-point. Vietnamese companies’ earnings are highly non-transparent, and massive macro policy errors last year have put the long-term attractiveness of the market in doubt. Furthermore, Vietnam’s high dependence on FDI flows and exports means that 2009 growth is under significant pressure. Vietnam’s entrepreneurial spirit and appealing demographics will make this market interesting again one day, but not for the next few quarters.

Equity strategy

How to make 2009 better
What are the factors that will decide whether
Vietnam has a more successful year in 2009? Cheaper valuations. Despite the collapse of the stock market over the past two years, the Vietnamese market does not look unarguably good value. The PE, based on the last reported earnings (2007) is 9.0x. If we assume that EPS fell 10% last year and will be flat this year (we have lowered this year’s growth assumption from the previous +15% to take into account worsened global conditions), that puts it on a 12-month forward PE of 10.1x (Chart 6). In an Asian context, that is only middle-ranking: among Asean markets, for example, Indonesia is on 8.0x and Thailand on 7.2x. Given the lack of transparency on Vietnamese earnings, investors will probably demand rock-bottom valuations before they are willing to re-enter. single stock foreigners can buy that has a market cap over USD1bn (and there are only five stocks with a market cap of USD500m or more and reasonable room for foreigners to buy that might qualify for small-cap funds) – see Table 7 for details. Moreover, turnover on the stock market (Chart 2) has almost dried up again, with the Hanoi Stock Exchange (the only one of the two Vietnamese bourses that most foreigners are happy to trade on) seeing turnover of only USD14m a day on average during December.In this environment, foreign enthusiasm for the Vietnam market has almost completely evaporated over the past few months. Foreigners Company earnings. A major problem with Vietnam is that listed companies’ earnings are highly non-transparent. That is partly because of a lack of consensus forecasts (very few analysts cover the companies), but also because only annual results are audited, and because extraordinary write-offs are generally taken only at year-end. The coming results season (listed companies have to report by end-January) will give some clarity on how bad real estate and stock market related losses were in 2008, and on the outlook for this year.
Privatisations. Large-scale IPOs were almost non-existent last year after the IPO of
Vietcombank in late 2007 (of course, global conditions did not help). We continue to take the view that privatisation of some of the crown jewels of the Vietnamese economy (in particular oil and gas, telecoms and banking), if well structured and sensibly priced, would attract significant foreign interest and get the stock market going again. The mooted IPO of telecoms operator Mobifone in H1 would be the first sign that this is happening. Interest rates come down significantly further. Despite sharp cuts in official interest rates (by 250bps in December alone), market rates remain high – and, indeed, government officials still talk frequently about the continuing risk of inflation. Overnight interbank rates are 5% and 10-year government bonds 10% (see Chart 4). This makes equities look relatively unattractive to local investors. Moreover, concerns about the currency (which fell 9% against the US dollar in 2008 – and was devalued a further 3% on 25 December) and the lack of dollar liquidity which makes it difficult to repatriate profit from VND-denominated equities – deter foreign investors too.
The end