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Vietnam (again) in the spotlight

Vietnam stands out among frontier markets because of economic growth, favourable stock valuations and abundant natural resources, argues Joshua Crabb, head of Asian equities at OMGI.
OMGI parts ways with Crabb's Asian equities team

Crabb, who manages the Old Mutual Asian Equity Income Fund is currently overweight Vietnam. However, it represents only 2.8% of his portfolio, according to the factsheet.

His fund has owned Vietnamese companies in a range of sectors – cement, construction, power, banking – rotating in and out of them as valuations change and opportunities arise.

“What attracts investors is the environment where you can buy cheap assets with good growth, not well known, with lower impact from US dollar debt and external factors such as China becoming a lot more expensive to manufacture in,” he said.

The government policy is important in developing countries because it can have a disproportionately strong effect on the economy. “[Vietnam’s government] has created quite a good environment, there’s been a lot of policy that’s been very conducive to improvement in growth,” Crabb said.

“[Vietnam] is not a very well-owned market,” he noted. On the one hand it means that there are still many undiscovered opportunities available for those who seek them, but on the other it means a higher volatility when investors change their minds.”

Investment opportunities can be risky because there are few quality companies with satisfactory corporate governance, noted JP Morgan’s Isaac Thong in an earlier interview.

A correction in Vietnam’s market is now the highest short-term risk, according to Crabb. “We’ve seen some fast money taken out of the market, but the long term position of good growth, solid foreign direct investment and decent valuations should mean that the risks are relatively muted,” he said.

“Since a lot of the drive of the economy is coming from FDI, [growth] spreads across all parts of the economy,” Crabb noted. Some sectors, such as banks or construction companies, naturally benefit first, since they are involved in the earlier stages of growth. But the benefits will spread to other sectors.”

Medium-term bull

Crabb’s bullish approach is based on long-term and medium-term factors. The long-term factors include a large, young and well-educated population and an abundance of natural resources: coal, minerals, oil and gas, timber, hydropower and others.

The medium-term factors include strong economic growth, a relatively low level of US dollar debt and foreign direct investment (FDI), which despite flowing into the country generously for many years, only recently has started bringing clear economic benefits.

“Everyone was enamoured with Vietnam in 2007,” Crabb said. “At that point it was expensive, it had some bubbles developing, there were issues with the banking system and the currency market.”

Vietnam’s GDP growth averaged around 7% in 2001-2007, according to data from The World Bank. In 2008 and 2009, during the global financial crisis, it dropped to 5.4%.

After the global financial crisis, “they rebuilt the banking system, the currency had devalued and the market became quite cheap,” Crabb said. “For the last several years, it has been a good market, but it is getting more attention only now.”

The Vietnam Ho Chi Minh Stock Index has increased 84% since January 2016 to the peak in early December 2017, and rallied particularly fast in the second half of 2017.

Despite these gains, Crabb believes the market is still relatively cheap. He will consider adding more positions after the recent market gains have consolidated.


The Old Mutual Asian Equity Income Fund vs its sector and benchmark

Source: FE. In US dollars over three years

Part of Mark Allen.