Can the Vietnam ETF Continue Its Run? - ETF News And Commentary
01 Junho 2012 - 8:42AM
Zacks
Vietnam ETF (VNM) was the third best performer
among all equity ETFs during the first quarter of 2012, behind only
Market Vectors Egypt ETF (EGPT) and Market Vectors
India SmallCap ETF (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. As a result, 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 included 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 (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.
MKT VEC-EGYPT (EGPT): ETF Research Reports
MKT VEC-INDI SC (SCIF): ETF Research Reports
MKT VEC-VIETNAM (VNM): ETF Research Reports
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