Vietnam was one of the best performing markets in January. Is it simply because it’s off a low base? And do you think it will continue?
Keep in mind that 2011 started with rapidly rising inflation and expectations that the state bank would hike interest rates, which they did aggressively. Not surprisingly, markets crashed as financing became scarce. Inflation peaked in September, but then markets became oversold as fears that banks wouldn’t be able to cope with rising non-performing loans (NPLs) led to panic selling.
This year started with the realisation that inflation is definitely under control. Consensus puts year-end inflation at 10% to 12%, less than half its 2011 peak, driving expectations of drastic interest rate cuts throughout the year. While NPLs are still an issue, large banks (which account for roughly 80% of Vietnam’s lending) seem to have plenty of liquidity and we find that liquidity issues are concentrated among the small banks, which the State Bank of Vietnam is officially looking to merge. This gave markets a sense that the fear was somewhat exaggerated. International press is now increasingly favourable to Vietnam and foreign interest has increased on the back of historically cheap valuations. Retail investors, which drive the market in Vietnam, are increasingly interested in putting money to work in the stock market, especially as physical real estate hasn’t bottomed yet.
Are there any concerns that inflation won’t reverse — and start creeping up again as the overall economy improves?
There are some concerns that inflation could be higher than expected, but the risks seem distant. The main drivers of inflation in the past few years have been, in no particular order: world commodity prices, a weak local currency and domestic credit growth.
If you think about world commodity prices, with global growth looking dim they seem unlikely to rally again this year.
The local currency has been stable during the past nine months thanks to a BOP [balance of payments] surplus and any concerns of an immediate and abrupt devaluation are remote in our view.
Domestic credit growth is set by the State Bank of Vietnam at 17% for the year, 40% higher than that of 2011 but well below the five-year average of 35%. Our view is that a credit growth above 15% is inflationary, so we could see modest inflationary pressure towards the end of the year, but nothing to be overly concerned about unless credit growth targets are exceeded.
Other factors to take into account include higher utility prices as Vietnam looks to remove subsidies on electricity and water and increase prices by 15% to 25%.
All the above factors have been taken into account to come up with our inflation target of 12% by year-end. Consensus is in the 10% to 11% range, less than half its 2011 peak — and interest rate cuts are expected to be announced in early April.
You have said to me in the past that Vietnam is the country in the region with the least headwinds from slowing growth in the rest of the world, but it’s still an export nation, so why is that?
If we look at the composition of Vietnam’s exports, the bulk is still low value-added goods like garments, shoes and accessories, and agriculture-related commodities. Our view is that these goods face rather inelastic demand and aren’t as much affected by a global slowdown as, say, electronics and other more valuable goods that the rest of the region exports. Moreover, anecdotal evidence from exporters of low value-added goods to markets like the US and Europe indicates that demand is expected to be stronger in 2012 than in 2011, in part because China is becoming increasingly expensive. If you look at the data, many of Vietnam’s regional peers already see negative export growth, while Vietnam still enjoys strong positive growth, albeit off the 2011 peak on a year-on-year basis.
What sectors should investors focus on when looking at Vietnam?
It’s usually better to be bottom up than top down in a market like Vietnam, but generally speaking, the consumer sector (goods and services) remains our top choice as many companies are cash rich and enjoy 20% to 40% organic growth in what are still underpenetrated markets. We also like commodities like sugar and fisheries, as well as companies around the rice trade (fertilisers, irradiation etcetera). Finally, we like selected companies in the banking and the industrial sectors.
What should they avoid?
We remain bearish on the real estate sector as a whole. Years of boom (until 2008 that is) brought about an oversupply of costly commercial and residential projects targeted at a high-end segment that never had real demand. Still today, projects started in 2007 are being completed, but many more are abandoned. We haven’t seen projects being sold at distressed prices yet and we don’t expect to see that happen later either.
At one point, however, the best returns will be in the real estate sector. When current projects are relatively well absorbed, monetary policy is loose and financing for the sector becomes more abundant (it’s very scarce at the moment), this will be the sector to be in, maybe as we get closer to the end of the year.