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 -0.4% in August to close at 984.1

The VN Index retreated 0.4% (TR$) in August to close at 984.1 amid volatile global markets and a renewal of trade tensions between the US and China.  After the Chinese RMB hit an 11-year low, the US labelled China a “currency manipulator”, which prompted China to announce a retaliation to US tariffs.  President Trump responded by raising tariffs on $550bn of additional goods from China.  Meanwhile, US macro data flashed red due to trade uncertainties:  The PMI fell below 50 and the yield curve inverted as investors fled to the perceived safety of Treasuries.

Foreigners are net sellers for first time in 11 months

Liquidity continued to pick up as average daily trading value increased to $192m (+13% mom).  Foreign investors turned net sellers in August for the first time in 11 months, net selling $74m worth of stocks – most of which withdrawn from ETFs.  Foreigners also net sold in other ASEAN markets, mostly Thailand, which experienced a net outflow of over 0.3% of its market capitalization – vs 0.04% for Vietnam.  Stocks that saw the largest outflows included VietJet (VJC, -$44m), Hoa Phat (HPG, -$22m), and VFM’s local ETF (E1VFVN30, -$20m).  Meanwhile, foreigners net bought $45m of Vingroup (VIC), mostly via one big put-through transaction.

Declines driven by ETF selling

Laggards for the month included Bao Viet (BVH, -9.5%), PV Gas (GAS, -7.8%), Vincom Retail (VRE, -6.8%), Masan (MSN, -5.8%), and Vietcombank (VCB, -3.0%), whose combined weight make up around 20% of the VNI.  The declines were driven ETF outflows, which exerted selling pressure on the large-caps.  By contrast, the best performer, property developer Dat Xanh Group (DXG, +13.7%) rallied strongly after the ex-date of its rights issue, after months of selling. Previously, the company’s share price had been weighed down by concerns of dilution by the rights issue, and the Government’s tightening of real estate development in Ho Chi Minh City.

New FOL indices propel FOL stocks

The Ho Chi Minh City Stock Exchange (HOSE) announced three new indices that follow FOL stocks, aiming to attract foreign flows and solve the “foreign premium” issue.  In anticipation of this development, FOL stocks performed well:  Mobile World Group (MWG, +9.5%) and FPT (+11.9%), and FOL banks including Vietnam Prosperity Bank (VPB, +9.4%), Techcombank (TCB, +4.6%), Military Bank (MBB, +4.1%) led the way.

Vietnam equities cheap on 2020F growth and valuation

While foreign selling is a risk in the short term given the current global climate, we see Vietnam as a long-term beneficiary of the current trade turmoil.  Per our forecast, earnings growth will accelerate in 2020 to over 18%.  At a 2020F PER of 10.8x, Vietnam’s market remains attractive.

PMI at six-month low while currency, inflation, trade good

Macroeconomic indicators were mixed in August, with the PMI falling to a six-month low.  On the positive side, the currency, inflation, and trade are all in good shape.  Meanwhile, Government expenditure has been very slow so far this year, which translates into a decent budget surplus but constrains GDP growth somewhat.

PMI experiences largest monthly drop of 2019

The August Vietnam PMI came in at 51.4 from 52.6 in July, the biggest monthly drop in 2019.  While consumer and intermediate goods producers saw gains, the softening of the expansion was from investment goods producers, i.e. factory machines and equipment.  That said, Vietnam is still one of the few countries that had softer, but not negative growth.  Regionally, ASEAN manufacturing firms’ operating conditions deteriorated at the fastest pace since Nov 2015 on subdued demand.  Singapore reported an all-time low reading of 48.7, while Malaysia, Indonesia, and Thailand all experienced manufacturing stagnation as well.

VND stable at 23,200 to the USD on $5.2bn ytd trade surplus

The VND remained flat at 23,200/USD, on decent supply from trade activity.  The trade surplus widened from $43m in July to $3.4bn in August, for a ytd surplus of $5.2bn.  The strong surplus in August was due to a 48.1% mom increase in mobile phone exports with the launch of the Samsung Note 10, pushing monthly export growth to 12.6% vs July, while that of imports declined slightly to 2.1%.  Notably, there were declines in imports of materials for textiles and footwear, which also saw a slowdown in exports due to rising uncertainty in US-China trade relations.

Average headline CPI down for third straight month to 2.57%

Inflation has remained stable throughout the year.  Average headline CPI was 2.57% in August, the third straight month of decline.  However, average core inflation inched up to 1.90% yoy, higher than that of August 2018 (1.38%) and August 2017 (1.47%).

Slower state spending good for budget, not so good for growth

On the fiscal side, state expenditure remains a concern this year as disbursement has been very slow.  Cumulative eight-month state expenditure only grew by 2.8% yoy, while revenue increased by 12.4%.  With a surplus of roughly $4.1bn ytd, the Government has used some of its extra cash to pay off around $9.15bn of debt (of which $7.7bn was domestic debt and $1.45bn foreign).  Netting off with total new issuance of $7.8bn, Government debt was reduced by $1.4bn.  Although a lower debt level is hardly a bad thing, we think that given the low interest rate environment both domestically and internationally, the Government could have been more aggressive with its borrowing and investing, thereby benefiting GDP growth.