The rally in Vietnam shares provides investors with a good opportunity to sell and stay out of the market until valuations better reflect fundamentals, according to Credit Suisse.
"The market's recent run provides a good opportunity to take money out of Vietnam," Credit Suisse says in a recent report. "Valuations still appear unattractive given the considerable risks and difficulty of investing in Vietnam."
Vietnam's price-to-earnings ratio of 31 times 12-month forward forecast earnings is the highest in Asia ex-Japan. (Thailand has the lowest at 13 times). The Ho Chi Minh Stock Index is up around 69% so far this year.
"For us to turn more positive on the market, we would need to see either cheaper valuations relative to other NJA markets to compensate for the risks and difficulties of investing in Vietnam, or structural changes that reduce those risks," Credit Suisse says.
The changes that Credit Suisse would like to see include reform of the currency exchange mechanism, de-dollarisation, liberalisation of foreign trading restrictions and more aggressive privatisations.
"We do not believe that Vietnamese valuations adequately compensate investors for the considerable risks," Credit Suisse says.
With regard to the long-term outlook for Vietnam's economy, Credit Suisse believes the economy looks supportive and it has raised its GDP growth forecast to 5.3% for 2009 and 8.5% for 2010. Solid domestic consumption and anticipated recoveries in exports and investment are the main causes. It is the removal of downside risks rather than surprises from growth drivers that have prompted Credit Suisse's upgraded macro view.
Despite the positive macro view, Credit Suisse notes that non-economic forces matter more for the market. In the short run, reduced bank lending should depress performance, and in the medium term, rich valuations seem a major obstacle, the firm says.