Vietnamese financial services are seen as promising investments as economic conditions improve. Bill Stoops, chief investment officer of Dragon Capital, the Vietnam-based asset manager, examines opportunities - and risks.

With improving economic conditions, the Vietnam financial services sector is becoming a choice destination for opportunities that deliver robust returns. Bill Stoops, chief investment officer of Dragon Capital, the Vietnam-based asset management, advisory and securities firm, talks about the country’s strengths and the direction it is going investment-wise in the next years. (Further details about the firm and Stoops is shown below this article.)

Vietnam has executed the classic recovery play and is now gaining momentum over its emerging market peers. After suffering from the implosion of its bubble-economy in the wake of the financial crisis, the austerity that crushed growth from 2010-13 has now effectively rebalanced Vietnam’s macro structure and the country is reaping the benefits.

While a rise in GDP of 5.4 per cent in 2013 was down from the pre-crisis norm of +8 per cent, growth is accelerating and is expected to reach 6 per cent in 2014, second only to China in terms of emerging market growth. With peers reeling from US tapering, Vietnam offers respite from the turbulence with robust economic indicators and opportunities for attractive double-digit returns.

The signs of recovery are becoming entrenched. The VND  [Vietnamese currency] is now anchored securely, with Vietnam’s consistent current and capital account surpluses allowing for the healthy accumulation of foreign exchange reserves. In 1Q 2014 alone, the State Bank of Vietnam announced the purchase of $7.5 billion of FX reserves. Inflation is also stabilising, with the first three months of 2014 culminating in a rise of just 0.9 per cent, the lowest level since 2002. This reflects the downtrend in core inflation and improved food security management.

With the inflation outlook falling below 5 per cent for 2014, there has been scope for monetary policy. Lending rates have come down to 11 per cent on average from 13 per cent at the end of 2013, and are expected to fall further to around 8.5 per cent to 9 per cent by the end of 2014. Such liquidity should help generate credit growth and further stimulate the real economy.

Turning to the real economy, manufacturing is looking to be a key growth driver, up 7.3 per cent in 1Q 2014 year-on-year. The March Purchasing Managers' Index recorded 51.3, indicating increased demand in new orders and production volumes, constituting the 7th consecutive month of expansion. In the retail sector, quarterly sales grew in real terms by 5.1 per cent in 1Q 2014, which is weak in historical terms, but given where we are in the recovery, this can be considered fairly robust.

Interestingly, in 2013 we observed stronger consumption in some big-ticket products, with personal car sales growing 19 per cent and the sale of an estimated 7 million smart phones positioning Vietnam as the second fastest growth market in the world for smart phone consumption. This demand reflects Vietnam’s burgeoning middle class and youthful population.

As part of its recovery, Vietnam is undergoing a number of structural shifts, notably bank restructuring and continued equitisation of state owned enterprises. The bank restructuring has two elements, the removal of bad loans through the state sponsored Vietnam Asset Management Company and the consolidation of the banking sector through mergers. The VAMC programme exceeded its 2013 bad-debt target, but has slowed since as low hanging fruit becomes less apparent and banks in better shape are reluctant to enter the programme.

The consolidation process gained momentum in 2013 and accelerated strongly in 2014. 13 banks have been restructured, with the number of local banks dropping from 43 in 2012 to 35 in 1Q 2014. The level looks likely to fall further to 14-17 banks by the end of 2016. Restructuring is helping to reduce risk in Vietnam’s banking sector and should benefit the broader economy.

Privatisation on the other hand, has not been nearly as successful over the last six years. SOE [state-owned enterprises] managers continue to lack motivation to privatise their businesses, and legal procedures remain cumbersome. Out of 1,000 existing SOEs, 432 are in the pipeline for privatization in 2014-16.

Targeted companies include several large contractors, three of the biggest power stations, VinaTextiles, Ca Mau Fertilizer, Vietnam Aviation Corporation, Vietnam Airlines and Mobifone. The Prime Minister is determined to get a few large SOE IPOs this year, however the impact will ultimately depend on the quality of the SOEs.

Beyond the internal factors, Vietnam’s external environment looks set to provide a boost to export led growth. Accession to the Trans Pacific Partnership, will provide Vietnam with access to a trade bloc accounting for 40 per cent of global GDP and 27 per cent of exports, including the US. Given Vietnam’s competitive advantage in terms of labour costs, it is expected that the removal of tariffs accompanying the TPP will accelerate exports. A study from Brandeis University places the gain at an additional $35 billion (measured in 2007 dollar terms) to GDP by 2025 and $5-8 billion by 2015.

Separately, Vietnam has been negotiating with the European Union for the EU-Vietnam Free Trade Agreement, which will similarly remove barriers to trade with a significant demand market. Beyond fostering investment and technological changes, the EVFTA and TPP will help stimulate institutional reform, improving the business environment.

Reflecting Vietnam’s accelerating economic activity and improved growth prospects, markets have been rallying, with the VI Index up 26 per cent in 2013 and 17 per cent in the first quarter of 2014 alone.
Sentiment has been upbeat amongst retail investors, with an increase in average daily trading value to $151 million in 1Q 2014, compared to $72 million in 4Q 2013.

Foreign investors are similarly buoyant, injecting over $100 million into Vietnamese stocks in the first three months of 2014, compared to $263 million into the HOSE during 2013. The uptick in trading activity has made investment in Vietnamese blue-chips a viable option for larger foreign holders seeking returns that are significantly more attractive than those in established markets. Vinamilk for example, one of Vietnam’s largest companies, gained 51.6 per cent in 2013, while other large companies such as Hoa Phat Group, a market leader in the steel industry, and PV Drilling, the monopoly drilling service provider, gained 100 per cent and 79.5 per cent, respectively.

Unfortunately, many foreigners find it difficult to invest in Vietnamese stocks to the extent they would like. The account-opening process is both complicated and time-consuming and foreign ownership limits remain in place. As such, listed-equity funds run by a number of foreign investment firms in Saigon offer some of the best opportunities for access to the market. Whilst performance, size and liquidity vary, sizable funds with index beating performance include DWS Fund Vietnam ($339 million), Vietnam Holding ($124 million), and Dragon Capital’s Vietnam Growth Fund ($308 million) and Vietnam Enterprise Investments Ltd ($563 million).

Going forward, Vietnam’s economy is likely to continue accelerating driven by continued macro stability, a positive credit environment, improving domestic demand, growth in manufacturing and the boost to exports that accession to the TPP and EVFTA will undoubtedly provide. How best to play the market remains a decision for the discerning investor, but given the dynamics of Vietnam set out above, the opportunities appear abound
About the author

Bill Stoops graduated from Brown University in 1978 (BA History). He has been working in emerging markets since 1980, starting in Hong Kong, where he was a journalist and political risk consultant. In 1983, Bill joined Schroder Securities as an analyst on conglomerates. He moved to Seoul in 1985 with Citicorp, to open Korea's first brokerage rep office. In 1989, Bill was recruited by Baring Securities in London to run its North Asian equity sales team. Barings subsequently transferred him to New York to establish a "New Emerging Markets" sales desk for the firm in 1993. Bill went on to specialise in Emerging Europe, and in this capacity also worked for Deutsche Bank and HSBC in 1998-2006. In 2006, he moved to Vietnam as a Director of Dragon Capital with responsibility for Research and Capital Markets. Bill was appointed CIO in 2009.