Vietnam’s Stocks Seen Gaining 65% as Rates Fall: Southeast Asia

Vietnamese stocks, Asia’s biggest losers during the past five years, are rising the most in 2012 as the nation’s largest money managers say falling interest rates will reverse the deepest earnings slump in three years.

The benchmark VN Index may extend its rally by another 65 percent through 2013 after climbing 24 percent since December, said Samsung Asset Management. Financial and real-estate companies in Asia’s 13th-largest equity market may lead gains, Eastspring Investments said. Dragon Capital, Vietnam’s biggest private stock investor, favors consumer and agricultural shares such as Vietnam Dairy Products Joint Stock Co. and Petrovietnam Fertilizer & Chemical Joint Stock Co., the nation’s largest listed fertilizer maker.

Vietnam is cutting borrowing costs from a three-year high after inflation fell to 8.3 percent this month from 23 percent in August, economic growth slowed to the weakest pace since 2009 and VN Index profits sank 12 percent in the first quarter. The stimulus has spurred Samsung Asset Management to invest in the country’s $40 billion equity market for the first time, while Vietnam mutual funds tracked by EPFR Global lured inflows for 20 straight weeks, the longest stretch for any developing nation.

“The stock market is discounting improving economic and corporate fundamentals ahead,” said Alan Richardson, who helps oversee about $87 billion as a money manager at Samsung Asset in Singapore. His Samsung ASEAN Securities Master Investment Trust has gained about 26 percent annually during the past three years, topping 92 percent of rivals, data compiled by Bloomberg show.

The Ho Chi Minh City Stock Exchange’s VN Index dropped 1.2 percent to 430.13 as of the 11:30 a.m. break, heading for the lowest close since May 24.

Leading Gains

While the VN Index has retreated 11 percent from its 2012 high on May 8 amid a global equity rout sparked by Europe’s debt crisis, the gauge has still outperformed indexes in all 73 markets tracked by Bloomberg this year except Egypt’s EGX30 Index and Venezuela’s IBC Index.

Vietnam’s stock market is classified by MSCI Inc. as a frontier market, which has an average stock-market value of about $29 billion. That’s 94 percent less than in emerging countries designated in MSCI indexes, data compiled by Bloomberg show. Vietnam’s market value of $40 billion is about half that of Walt Disney Co., based in Burbank, California.

The MSCI Frontier Markets Index, which includes shares in 25 countries with a combined market value of $369 billion, has slipped 2.5 percent this year. Institutional money managers tracked by EPFR Global and Citigroup Inc. have about $11 billion in frontier-market funds, compared with $654 billion in emerging markets, according to a November report by New York-based Citigroup.

Bond Rally

Vietnam’s stock exchange in Ho Chi Minh City started trading in 2000 with shares of four companies that began as state-controlled businesses. The first private company was listed four years later and a second bourse in Hanoi opened in 2005. The two exchanges now have about 700 stocks. The ruling Communist Party has plans for 254 government-run businesses to sell stakes this year, according to the State Capital Investment Corporation’s website.

Vietnam’s bond market is also signaling higher confidence that policy makers have tamed Asia’s fastest inflation rate.

Five-year government securities in Vietnam have surged this year, sending yields down 287 basis points, or 2.87 percentage points, to 9.68 percent, the biggest drop among 43 countries tracked by Bloomberg. The nation’s currency, the dong, has been little changed at about 20,900 per dollar for the past 15 months, after losing about 18 percent the previous three years.

2011 Retreat

Vietnam’s stocks and bonds retreated in 2011 as the central bank raised interest rates by 6 percentage points to restore confidence in the dong, reduce inflation and curb a 28 percent surge in credit growth. The policy helped slow the economy’s expansion to 4 percent in the first quarter of this year from 6.8 percent at the end of 2010, government data show.

More than 17,700 companies halted production in the first four months of 2012, according to the Ministry of Planning and Investment. Per-share earnings in the VN Index declined to 41 dong at the end of March from 46 dong a year earlier, the biggest drop since the year ended June 2009, according to data compiled by Bloomberg.

Weaker exports may prolong the country’s economic slowdown. Overseas sales fell to $8.96 billion in April from $9.48 billion in March, government data show. Growth in garment shipments, Vietnam’s biggest export, slowed to 15 percent through April after expanding 33 percent a year earlier, according to preliminary figures from the statistics office.

Trading volumes have discouraged some investors from buying Vietnam stocks. The 30-day average value of shares changing hands on the Ho Chi Minh Exchange as of May 24 was 1.6 trillion dong ($77 million), data compiled by Bloomberg show. That compares with about $52 million in Dubai and $14 billion on China’s Shanghai Stock Exchange.

Growth Spur

“Liquidity is one of the big issues,” said Andrew Beal, a London-based money manager at Henderson Global Investors who helps oversee about $104 billion and invests in Vietnam through closed-end funds listed overseas.

While the slowdown has been “painful,” Vietnam’s $106 billion economy will probably recover toward the end of this year as the government switches its focus from curbing inflation to spurring growth, said Dominic Scriven, who co-founded Dragon Capital, a Ho Chi Minh City-based money management and securities firm, in 1994.

The government cut corporate income tax for small- and medium-sized companies by 30 percent this month, and Deputy Prime Minister Nguyen Xuan Phuc said on May 21 the government will help some companies repay loans.

Interest Rates

The central bank, led by Governor Nguyen Van Binh, has reduced its benchmark refinancing rate by 300 basis points to 12 percent since March and capped some lending rates for smaller businesses at 14 percent this month. Binh said in March that policy makers would cut borrowing costs by 100 basis points in each of the second, third and fourth quarters.

The government has stepped up efforts to bolster lenders and has encouraged takeovers of weaker financial institutions, Fitch Ratings said in a May 11 statement, affirming its B+ foreign-currency credit rating for Vietnam, four levels below investment grade.

Policy makers will probably reduce borrowing costs further this year as inflation falls toward 7 percent, the slowest pace since 2009, said Scriven, who expects corporate earnings to rally about 14 percent this year.

“There’s a steely determination in the government to regain the mandate and confidence of Vietnamese savers, investors and businesses,” said Scriven, whose $415 million Vietnam Enterprise Investments Ltd. fund is the biggest actively-managed stock fund focused on Vietnam, according to data compiled by Bloomberg. It returned 14 percent in dollar terms during the past 18 months, beating the VN Index by 14 percentage points, the data show.

Stock Valuations

Earnings at Ho Chi Minh City-based Vietnam Dairy Products, known as Vinamilk, will probably climb 15 percent this year and 35 percent in 2013, according to the average of analyst estimates compiled by Bloomberg. The dairy producer is valued at 10.8 times reported profit, compared with 29 times for global packaged food and meat companies, according to data compiled by Bloomberg. The stock has returned 2.8 percent this year.

Petrovietnam Fertilizer, based in Ho Chi Minh City, posted a 69 percent surge in unconsolidated net income in the first quarter. The shares, up 45 percent this year, trade for 3.8 times trailing 12-month earnings, versus the 27.1 times average for global peers, according to data compiled by Bloomberg.

Consumer Demand

While the VN Index’s rally has boosted its price-to-reported earnings ratio to 9.8 from 7.2 at the start of this year, the measure is still about 34 percent cheaper than its five-year average, according to data compiled by Bloomberg. The VN Index has lost 60 percent during the past five years, the most among stock gauges in 17 Asian nations tracked by Bloomberg.

“The level of valuations is quite low compared to international standards,” Ngo The Trieu, who oversees about $1 billion as head of public investment at Eastspring Investments, the Vietnam unit of Prudential Plc’s asset management business.

Long-term investors will benefit from Vietnam’s surging consumer demand and its allure to global manufacturers as a lower-cost alternative to China, according to Dragon Capital’s Scriven. Retail sales increased 22 percent in April, near the 24 percent average growth rate since 2005, according to data compiled by Bloomberg.

About 95 percent of Vietnam’s 91 million people are below the age of 65 and the minimum wage is equivalent to about $67 a month, compared with about $230 in Shanghai, according to the U.S. Census Bureau and government statements.

Stock Outperformance

Nokia Oyj, the Espoo, Finland-based mobile-phone maker with about 6 percent of its long-term assets in China, said last month it started building a manufacturing plant in Vietnam’s Bac Ninh province and plans to start production of low-cost phones next year.

The VN Index has outperformed the Shanghai Composite Index by 17 percentage points this year as Vietnam funds tracked by EPFR Global recorded $122 million of inflows, equivalent to 13 percent of their total assets. China funds lured $1 billion during the same period, or 3 percent of assets, the data show.

“In the long-run, we are still very positive on the market” in Vietnam, said Tran Thi Kim Cuong, head of equities at Manulife Asset Management (Vietnam) Co. “We are still buying stocks.”