By W A Stoops
The global equity rout following China’s devaluation has called the prospects for emerging markets into question. While the asset class may face challenges, Vietnam is one country that has long since restructured its economy to forestall them. Vietnam’s robust fundamentals will not suffer unduly from recent events, and the lower valuations which the yuan shock has created represent a buying opportunity.
Economy trumps peers
Vietnam is in many ways the antithesis of its peers, perhaps because it was forced to learn hard lessons from its boom-bust crisis. It has minimal inflation and a relatively stable currency; also little commercial foreign debt to speak of, vibrant exports that are mostly manufactures not commodities, a structural balance-of-payments surplus, active roll-back on State-owned enterprises (SOEs), a serious program to clean up banks, and capital markets that are starting to get modernized.
Exports are the lynchpin, and if global growth slows, they may decelerate – but by a lot less than peers. In a recession, lower-end manufactures tend to be more resilient, plus Vietnam continues to gain global market share as foreign direct investment keeps rolling in and production is relocated to the country. Furthermore, Vietnam has just signed a huge free-trade agreement with the EU, and an even bigger one impends with the US, in the form of the Trans-Pacific Partnership.
Exports pump the domestic economy by providing employment which in turn drives consumption. Property is recovering, which helps bank restructuring and fuels new lending. The government is rejuvenating infrastructure, which is a classic form of stimulus. With all these growth forces accumulating, GDP is still likely to increase by 6.5% in 2015, and by something closer to 7% in 2016-17.
Currency risks are purely external
The yuan shock has impacted on the dong. Before the seismic event, the Vietnamese government had been running a policy of mini-devaluations to help out with export competitiveness, and from 2013 had taken the currency down by 4%. Since the Chinese move a bit more has had to be done and there was 3.5% adjustment. All in, the dong has lost 7.5% against the US dollar in two and half years, much of that in the past month, at a time when other emerging-market currencies have been imploding. The dong’s only real vulnerability is to exogenous factors, reflecting the weaknesses of other countries, not of Vietnam.
Reforms are gathering momentum
Meanwhile, the ruling party is preparing for its Five-Year Congress in February 2016. Progressives have been gaining traction in the past few of years, as can be seen from the dethronement of SOEs and the prudential crack-down on banks. No less important have been the efforts to start raising foreign ownership limits on listed stocks and to get privatisations moving again. If progressives take power and accelerate their programme, Vietnam’s prospects will be very bright indeed.
Stock market
Prior to the yuan shock, Vietnam had outperformed most of its peers year-to-date. But even so, it boasted lower valuations, at 11x 2016 PER on 21% EPS growth. If earnings forecasts have to be knocked back for Vietnam, it will only be worse elsewhere. And meanwhile the market is still down 9% from its pre-shock level. That decline has happened in tandem with global markets – not because but in spite of economic fundamentals. Whenever that occurs, buying opportunities usually beckon.
Conclusion
China’s troubles are undoubtedly having a ripple effect, but Vietnam looks set to withstand the pressure better than other emerging markets, and valuations on domestic equities are particularly attractive.
W A Stoops is CIO at Dragon Capital
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