Vietnam

Vietnam continues to be one of Asia’s most compelling investment stories. With 94 million people – 41% of whom are aged under 25 – this young and dynamic country is the world’s 15th most populous.

Vietnam benefits from excellent demographics, an entrepreneurial culture, abundant resources, a largely coastal population living on its long seaboard, and a strategic location bordering China in the north.

Vietnam’s lower wages and operating costs are allowing it to capture manufacturing business from China. At the same time, newly signed trade agreements and internal reforms are making it ever easier for foreign companies to do business here.

Consistently growing by close to 7% annually, Vietnam is rapidly transforming into an export powerhouse with a thriving domestic consumer market to match. As a place to invest, the country continues to offer extraordinary potential.

VNI slides 0.6% in December to close 2019 up 9.9% at 961

Despite generally buoyant global markets, the VN Index fell 0.6% ($TR) in December to close the year at 961, bringing the 2019 return to 9.9%.  The Index hit a 10-month low on 18 December before the market recovered thanks to MSCI’s confirmation of Kuwait’s upgrade to EM status, which means a higher allocation to Vietnam in the Frontier Markets.  Positive developments in US-China trade negotiations also helped sentiment.  Moody’s revision of Vietnam’s outlook to negative due to a delay in the repayment of an indirect Government debt was brushed off by both equity and bond markets, as Credit Default Swap (CDS) prices and bond yields continued falling.

Trading volume falls slightly while foreign outflows continue

Average daily traded value fell slightly to $200m (-1.2% mom).  Foreign investors remained net sellers for the fifth consecutive month, withdrawing $38m from the HOSE.  Stocks experiencing the most foreign outflows included Masan (MSN, -$26m), Vingroup (VIC, -$19m), and Vinhomes (VHM, -$16m).  By contrast, VFM’s local ETF E1VFVN30 received the most foreign inflows at $13m, followed by Hoa Phat Group (HPG, +$8m).

Most bank stocks outperform but MSN nosedives

Bank stocks were mostly positive, led by BIDV (BID, +14%) and Vietcombank (VCB, +5.7%).  On the other hand, MB Bank (MBB) fell 6.1% following its announcement that it would sell 23m (just 49%) of its treasury shares.  And the month’s worst performer, MSN, plunged 19.1% on news of the planned merger between VinCommerce and Masan Consumer Holdings, giving rise to worries about the impact of VinCommerce’s large losses on MSN’s P&L.

Banking ETF to be introduced; decree to hit beer consumption

Saigon Securities Corp (SSI) announced plans to introduce an ETF that will track Vietnam’s top banks.  This reinforces the trend of the creation local ETFs aiming to attract foreign investment and solve the “foreign premium” issue.  In other news, the Government introduced a new regulation that significantly tightens drunk driving laws by imposing stricter standards on the limit of blood alcohol content and higher penalties on violations, to go into effect on 1 Jan 2020.  This may negatively impact alcohol consumption and hit sales of Sabeco (SAB) in the near term as initial enforcement is expected to be tough.

Vietnam becomes more attractive after recent market decline

The market’s disappointing recent performance seems to have been driven more by poor retail sentiment rather than by fundamentals.  Looking ahead to 2020, as the valuation discount between Vietnam and its peers widens while earnings growth accelerates, Vietnam’s market is becoming more and more attractive.

Vietnam’s economy powers ahead in 2019

Vietnam achieved solid and sustainable economic growth in 2019, with GDP rising 7.0% yoy despite modest credit growth of just 13%+.  The banking sector’s NPL level was at a historical low while FX reserves hit an all-time high, although headline inflation was relatively high.

GDP up by 7.0% in 2019, beating Government target

Vietnam’s stellar 2019 GDP growth was the result of a solid industrial sector, which grew 8.9% yoy – the same as in 2018, and an improving services sector (+7.3% yoy vs +7.0% in 2018), while the agriculture sector (+2.0% yoy) was a slight drag on growth.  The actual result beat the Government’s target of 6.8%, which remains the guidance for 2020.

GDP expansion achieved with lower level of credit growth

Previously, the same level of GDP growth would have required credit growth of 15-17% and a significant drop in lending rates.  However, actual total outstanding loans in 2019 increased at just 13%+, coupled with a historically low NPL level of 1.89%.  Nonetheless, we think it is unhealthy that the spread between the lending rate and bond yields widened.  Throughout the year, bond yields consistently made new lows, with the 5Y VGB currently trading at 1.8%.  One of the root causes for the gap was the still-high funding cost, resulting from deposit competition from ‘less competitive’ banks.

Headline CPI ends 2019 at +5.2% yoy, but core inflation just +2.0%

Headline CPI ended 2019 at 5.2% yoy, due to a 9.2% rise in food and foodstuff prices on a pork shortage caused by the African Swine Flu.  During 4Q19, the pork price almost doubled due to a spike in demand from the coming Lunar New Year.  However, core CPI remained well controlled at 2.0% yoy and average CPI was 2.8% yoy.  Unlike in 2011, when the pork price rally led to the CPI going as high as 23%, this time is different thanks to deeper participation of corporates in the livestock industry, which consolidates production and creates large herds.  While the CPI should remain high in 1Q20 at ~6.5% yoy, we expect it to average 4.0% for the year.  Meanwhile the currency remains unchanged and foreign reserves are at $80bn, an all-time high.

Moody confirms sovereign rating at Ba3 but changes outlook to negative

In December, Moody’s confirmed Vietnam’s rating at Ba3, but changed the outlook to negative.  As this was not a downgrade, it will not have a material impact on Vietnam’s offshore funding cost.  In fact, there was muted reaction to this news and Vietnam’s CDSes now stands at 98 – an all-time low level.  Even so, the outlook change should be a wake-up call for the Government to resolve its authority complications, similar to the Vinashin default in 2010 that triggered a change in Vietnam’s economic model from SOE-led to private sector-empowered.