After a slowdown, the country’s economy has stabilised; prompting investor sentiment to improve and money to flow back. The various indications include rising business confidence, a foreign currency ratings upgrade, and overwhelming demand for Vietnam’s recent sovereign bond offering – which was more than 10-times oversubscribed.
Meanwhile, the official real gross domestic product forecast for 2015 has been raised to 6.2% from a targeted 5.8% in 2014. Most importantly, the government and central bank seem to be making the right decisions this time around. They are acting in a more technocratic way by forcing banks to properly recognise non-performing loans and are also pushing through state-owned enterprise reforms.
Transitioning to the top-end
Although manufacturing remains a crucial part of Vietnam’s economy, we sense that the best time for low-end manufacturing in Vietnam lies in the past. Due to high labour requirements and environmental concerns, traditional manufacturing sectors such as textiles are not strongly encouraged by the government.
Instead, the government now favours high-value-added industries – such as electrical and electronics, healthcare, education and environmental and energy efficiency technologies. It has granted preferential corporate tax rates to these sectors, leading to an increasing shift in Vietnam’s exports from low-end manufactured goods to higher-end electronics. Mobile phones have recently overtaken textiles as Vietnam’s largest export.
The opportunity in banks
We see financials as a good area for investment. A banking system operating within a growing economy with controlled NPLs is likely to be a good starting point if you wish to identify growing, profitable banks. We see many such examples in Vietnam and other frontier Asian markets.
Additionally, the banking systems in many of these countries have been through a crisis in the past 20 years. Having learned from the painful experience of excess leverage and a severe bad debt cycle, lending practices have been improved. Simplistically, most concentrate on taking deposits, making loans to consumers and businesses, and processing transactions; this model can been supportive of profitability, if well-managed. The valuations for these banks are also favourable.
The challenges for Vietnam
Against this positive backdrop, there are challenges Vietnam needs to address to maintain the FDI inflows and to encourage stock market investment. These include: low liquidity and foreign ownership restrictions, poor infrastructure, inefficient logistics, rising costs and lower worker efficiency.
Faltering attempts at equitization in Vietnam have also been disappointing. The long-awaited privatization program finally kicked off in 2014, with the sale of stakes in apparel-maker Vinatex in September and Vietnam Airlines in November. However, the stakes offered were small and unlisted, with foreign participation non-existent.
Top stock picking prospects
In terms of valuations, equity multiples in Vietnam are only slightly ahead of other frontier markets, as the market has outperformed on the back of positive macroeconomic news. It trades on a P/E of 13.5x and a P/B of 2x. However, currently there are areas of the market where earnings are at cyclical lows, and we expect those to rebound as the economy continues to pick up.