Is the expensive Vietnam market worthwhile?

Asset Class in Focus

ETF inflows in recent years have made Vietnam’s large-cap stocks more expensive, according to Dragon Capital.

Within Asia, Vietnam has often been under the spotlight, given its high growth of nearly 7% per year, growing middle class, and positive current account.

The privatization of the public sector has also made the market more attractive, according to Bill Stoops, chief investment officer at Ho Chi Minh-based Dragon Capital. State-owned enterprises (SOEs) now account for only 30% of Vietnam’s economy, which compares to 60% in 2001.

But what makes Vietnam even more attractive is that it has been a key site for relocation of factories exiting China, a trend accelerated by the US-China trade dispute.

“The whole Southeast Asia region is a trade-war beneficiary. Supply chains are shifting to Southeast Asia from China, it’s just that Vietnam is the most obvious beneficiary given its macro stability, bigger population and lower labour costs,” he told FSA during a recent visit in Hong Kong.

“Vietnam ticks all the boxes.  There are some countries in the region that tick some of the boxes, but not all of them,” he added.

Expensive large-caps

The Vietnam equity market has clearly outperformed the region on a three-year cumulative basis. The FTSE Vietnam Index returned 37.15%%, which compares to the 23.93% return of the MSCI AC Asia (ex-Japan) Index, according to FE data.

However, much of the performance of the Vietnam index is driven by large-cap companies, according to Stoops, adding that the attractiveness of the market has led global institutions to increase investment over the past three years.

“A certain phenomenon has happened in recent years. Big money is coming from outside, mostly in the form of ETFs. Some are active funds but are also behaving like ETFs, in which they just buy anything big, with no questions asked about fundamentals,” Stoops said.

But with the huge inflows, large-cap companies have also become more expensive. Overall, Vietnam’s market has 1,600 stocks with an average price-to-earnings ratio of just 11x. Popular large-cap stocks, such as Vietcombank and Vinamilk, have PERs of 18.9x and 21.3x respectively.

Stoops brushed off valuation concerns as some of these large-cap names have high earnings growth and return on equity. For example, Vietcombank’s EPS growth is 21.3% while Vinamilk’s ROE is 41.7%.

“Management is also quite good. The stocks may be expensive, but they are investment-worthy because they have the quality that you need,” he said.

Both Vietcombank and Vinamilk are among the Dragon Vietnam Equity Fund’s (VEF) top 10 holdings, according to the fund factsheet.

Top 10 holdings

Source: Dragon Capital. Benchmark index: FTSE Vietnam Index.

Fund vs benchmark

While the fund is invested in these large-cap companies, large cap exposure is only around 28.4% of the portfolio. The remainder is invested in small-to-mid-cap companies.

Source: Dragon Capital

Stoops acknowledged that the fund has recently underperformed its benchmark, the FTSE Vietnam Index, given that most of the stock appreciation in the market came from large-cap stocks.

Annual calendar performance (%)

Source: FE Analytics. In US dollars.

“We have beaten the market several times, although the huge inflows toward large-cap stocks have caught up with us,” Stoops said.

Stoops finds value in holding small-to-mid cap names. He believes a number of them are “deep value” stocks with low PERs but high EPS growth rates and ROEs.

For example, Vin Hoan, which has a market capitalization of $334m, has a very low PER of 5.3x. However, its EPS growth this year is 13.4% with an ROE of 28.2%. Vin Hoan is the third largest holding of the VEF.

Stoops noted that the firm has a preference for companies with sustainable earnings and solid management teams. Out of the 1,600 stocks in the Vietnam equity universe, VEF holds 35-40 names.


The Dragon Vietnam Equity Fund versus its benchmark index

Source: FE Analytics. In US dollars.

 

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