Neena Mishra: Vietnam ETF (NYSEARCA:VNM) was the third best performer among all equity ETFs during the first quarter of 2012, behind only Market Vectors Egypt ETF (NYSEARCA:EGPT) and Market Vectors India SmallCap ETF (NYSEARCA:SCIF). That was in sharp contrast to its extremely dismal performance in 2011, when it sank by almost 47%, much worse than other emerging markets, as the investors were concerned about the future prospects for the economy. However as the economic situation improved, the investors have poured money into the fund, which is now up 24.7% year-to-date, while the broader MSCI Emerging market index is down 1.1%.
Political and economic reforms (Doi Moi)) launched in 1986 transformed Vietnam from one of the poorest countries in the world, with per capita income below US$100, to a lower middle-income country with per capita income of about US$1300 in 2011. Poverty ratio has fallen
from 58% to about 12% in 2009. (Read: Invest in Indonesia -The New Rising Star of Asia).
Even though Vietnam is a communist country, their brand of communism is similar to that in China, with market friendly policies. Foreign capital has flowed into the country as a result of the reforms. (Read: Is The Vietnam ETF Back On Track?).
Vietnam’s GDP increased by more than 8% annually from 2003 to 2007, before the global recession hit the export oriented economy. The IMF projects that the economy will slow down to 5.6% in 2012 from 5.9% in 2011 but rebound in 2013 to 6.3%.
Positive demographics further support the future growth prospects. The population is 91.5 million with a median age of about 28 years. Many of the younger people live in the major cities of Hanoi and Ho Chi Minh City and can speak English. Unemployment rate at 2.3%is among the lowest in the world. (Read: Why Colombia ETFs May Continue to Rise)
Vietnam continues to be the main beneficiary of the migration of low-end manufacturing out of China as the producers shift factories to take advantage of wages that are about half of that in China. The shift in China’s policy to focus more on domestic consumption will also benefit Vietnam as an outsourcing center. However we may add that Vietnam now faces strong competition from neighbors like Bangladesh and Cambodia.
Economy still suffers from some structural problems like inefficient and wasteful public enterprises (which account for about 40% of output), undercapitalized banking sector and high trade deficit.
2011 was a bad year for the economy as the growth slowed, inflation spiked (touched 23% in August last year), and trade deficit worsened, leading to serious concerns about the future prospects for the country. Last year the government passed a resolution to restrain credit growth and control inflation and the central bank raised rates several times.
Late last year, the Government announced a three pillar economic reform program aimed at restructuring public and state-owned enterprises and the financial sector, as the top priorities for the next five years.
Further in March, the government approved and published a broad plan for banking sector reform. The plan includes merger of weak banks and recapitalization of the banking system though it lacked details on how the government will arrange funds for recapitalizations.
The economy seems to have turned the corner and the inflation now seems to be coming under control as it reached a 21- month low of 8.34% in May.
Earlier this month, Fitch Ratings affirmed Vietnam’s Foreign- and Local-Currency Issuer Default Ratings at ‘B+’, with a ‘Stable’ outlook. According to the rating agency, “the ratings and Stable Outlook reflect the success so far of efforts by Vietnam’s authorities to tackle the macro-financial imbalances that arose in 2010 and 2011.”
With the inflation under control, the central bank has more flexibility to lower rates in order to support growth. As expected by the market the bank announced 100 basis points cut in the key rates earlier this week (third rate cut this year).
Persistent current account deficit also appears to be on the correction path now. After contracting in 2011, foreign investment in Vietnam is accelerating again.
Market Vectors Vietnam ETF (NYSEARCA:VNM)
VNM tracks the Market Vectors Vietnam Index, which provides exposure to the publicly listed companies that are domiciled and listed in Vietnam or derive at least 50% of their revenues from Vietnam.
The ETF currently holds $312.6 million in AUM and charges 76 basis points to the investors annually for expenses. The expenses are contractually capped at the current level through May 2013 and may go up to 92 basis points after that date.
The fund holds 35 securities, with an average weighted market cap of 4.1 billion. The focus is on mid-cap (50%) and small-cap (37%) stocks while large-caps make up just 13% of the total assets. In terms of sector exposure, financials occupy the top spot with almost 50% weight. Energy (22%) and industrials (11%) hold the next two spots. About 70% of the shares in the ETF have direct Vietnam listings, while the rest are for companies in other jurisdictions that have substantial operations in the country.
VNM’s 50% weight to financials is our main concern with this ETF, due to the health of the country’s banks. In addition to being undercapitalized and faced with rising non-performing assets, the financial system lacks transparency. It remains to be seen whether the reforms launched recently will be able to improve the health of the banking system.
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