Vietnam Funds Rekindle Vietnam Fire

It seems like only yesterday when a foreign capital tsunami flooded Ho Chi Minh City funding new enterprises and encouraging the government to take the shackles off select blue-chip state-owned companies. The euphoria started as early as eight years ago when Vietnam’s domestic investors embraced capitalism after the country’s pioneer stock market, the Ho Chi Minh Stock Exchange, opened in the heart of the city’s economic hub and the newest wave of Vietnam funds poured into this red-hot emerging market.

Over the last several years, Vietnam’s financial figures have been legendary by any emerging nation’s standard, enchanting throngs of businesspeople, investors and economists. The country’s $71 billion economy was significantly bolstered by the industrial, construction and service sectors expanding by an average of 8.4 percent last year. The capitalization-weighted benchmark VN Index, delivered returns of almost 240 percent over the last four years.

Against this bullish backdrop, it’s no wonder that the curtain rose on HCMC’s heralded stock market became home to at least 25 Vietnam investment funds managing more than $10 billion in assets according to Emerging Portfolio Fund Research (EPFR) Global, a US-based firm.

Fast forward to today. Vietnam’s storied dynamic growth has been buffeted by both internal and external forces, over the past six months, creating anguish and heartache for many rising middle class domestic investors and migraines for the government’s economists and policymakers.

“ Vietnam is just experiencing normal financial cycles. A loss of 67 percent in the index over the level over the last year is consistent with bear markets in other Asian countries over the years. Of course, it’s painful to lose money but the current valuations in the market, with average P/Es of around 8-10 times is more sustainable and will result in more efficient allocation of capital,” claims Chris Freund, managing director of Mekong Capital Ltd.

Global investors and fund managers confidence, has been roundly tested over the first half of this year with the deepening inflation, a ballooning trade deficit, and the dramatic downturn in the stock market. For sure, Vietnam’s economic growth slowed down to an estimated 6.5 percent during the first half of the year.

Vietnam’s integration with the global community has not spared it from the worldwide rise in fuels and food. For many Vietnamese families, the 23 percent increase in the cost of basic food staples is difficult to swallow. Again, the escalating food-price inflation is not exclusive to the country since the food transportation costs have skyrocketed globally.

Fund managers have been vigilantly observing the measured-steps the government is taking to impose limits on key exports, provide tariff reductions on selected imports, and rein in public-sector construction projects.

There are still scattered clouds hanging over Vietnam’s economy since the arrival of this year’s near perfect financial storm slammed into the Asia’s acclaimed financial tiger. Witness the thousands of local investors who have watched their savings evaporate in the nascent stock markets as domestic stocks plummeted. Nevertheless, the current global economic storms may offer a silver lining for Vietnam, if the government policymakers are able to enact fundamental and painful controls over the liberal credit granted last year to real estate and stock speculators.

Since 1990 Dragon Fund’s Dominic Scriven has been a resident of Vietnam and deserves much credit for pushing the government to establish the stock exchange and encouraging the equitisation of state-owned enterprises by listing their shares. His tenure and recognition by the government is a reflection of endurance and patience. Like other investors, he was caught in the country’s economic turmoil in 1998 but stayed on to benefit from the rise of the benchmark VN-Index to almost 145 percent just two years ago. His flagship fund, Vietnam Enterprise Investments Ltd. returned 88 percent in 2007 after losing at least a third of its value in its first six years.

Today, Dragon Capital is justifiably considered the country’s largest fund manager with $2 billion of assets.

“The government is doing the right things…now all asset markets have crunched over the past 12 months; however, I think value either has or is appearing, but it needs to be viewed selectively,” says managing director, Dominic Scriven.

The government appears to have acted swiftly in introducing regulations on capital controls to prevent any possible capital flight if the market is adversely impacted by outside market forces. Also, policy makers have exercised restriction on trading bands and directed State Capital Investment Corporation to buy shares as pro-active tools to prop up the country’s struggling stock markets.

“The key to the direction of the market over the remainder of the year will be domestic investor sentiment. Foreigners have been steady buyers of the market this year, buying between $28 million and $122 million every month,” writes Gary Evans, equity analyst for HSBC in the July issue of Vietnam Monitor.

Vietnam has two stock markets: the Ho Chi Minh Stock Exchange (HOSE) and the Hanoi Securities Trading Center (HaSTC,). HOSE is the primary exchange with a market capitalization of approximately $21 billion and more than 160 listed stocks. In the north, Hanoi’s market cap is about $8 billion with 140 stocks listed.

Before the market spiraled downward, Vu Bang, chairman of the State Securities Commission of Vietnam, expressed confidence that the total market capitalization of listed companies is set to amount to US$30-40 billion representing upwards of 40 percent of the country’s gross domestic product (GDP) by 2010.

Dr. Vuong Quan-Hoang, a widely published author on Vietnam’s stock market and the director of the Center for Post-graduate Research at HCMC Open University expresses confidence that the stock market will recover this year.

“ My collegeaue, Professor Andre Farber and I believe that Vietnam may still do well in terms of economic performance, although challenges are out there waiting to be sorted out. If there is proof that Vietnam may meet its GDP growth target and slows inflation, the stock market will surge significantly,” asserts Hoang, also founder of InvestVietnam Corporation.

Few investors deny that only a little over a year ago Vietnam was counted among Asia’s fastest-growing economies; however, its stock market boom quickly acquired the ominous pre-bubble dimensions. At its peak in March 2007, the combined capitalization of the Ho Chi Minh City and Hanoi stock exchanges rose to nearly US$29 billion — more than 40% of GDP — from less than US$1 billion in 2005.

In recent months, new Vietnam funds have been established to seek out opportunities in the remapped investment climate. For example, Hathaway-Nguyen Capital Management established a U.S.-based fund, with Terence Pavlic, a Milwaukee-based money manager which intends to invest between $35- $50 million after carefully studying opportunities from the more than 300 companies listed on Vietnam’s two exchanges. This fund’s management is confident that there will be excellent investment opportunities before the end of 2008.

For 40-year old fund manager Rodney Hathaway, it’s a return to his home country. “I went back last year for the first time. I think the timing is excellent to leverage my Wall Street experience and to bring a U.S. based investment perspective to the country,” says the ebullient Hathaway.

EMA Vietnam Fund, a Boston-based equity fund and also new to Vietnam, is seeking pre-IPO and undervalued growth companies in Vietnam.

“ VN has specific investment challenges and offers a risk/reward perspective much different than other markets that we invest in. I believe the current market correction and macroeconomic picture has helped to highlight the really undervalued investment opportunities for us,” adds Giang Lam, managing director EMA Vietnam Fund, LP.

According to Ministry of Planning & Investment foreigners own about 25 percent of stocks listed in HCMC and 15 percent of those listed in Hanoi. The latest law allows foreign investors to own up to 49 percent of most listed stocks, except for bank stocks, where the limit is 30 percent. In the July issue of Vietnam Monitor, published by HSBC Global Research, their equity strategist, Gary Evans writes that “ Foreigners have been steady buyers of the market this year, buying between $28 million and $122 million every month. Even when the market was in freefall, the country funds that raised money last but had no opportunity to invest it, continued to pour money into Vietnam.”

Louis Nguyen, a veteran fund manager announces that his fund, Anpha Capital has recently changed its name to Saigon Asset Management Corp. to differentiate itself from various companies with a similar name in Vietnam and to reflect the former city name as a globally renown place.

“Vietnam is not the only country that is affected by the global downturn. This country still has much stronger growth momentum than most nations in the world and the economy will stabilize. The only variable is the policymakers’ actions ahead and only time will tell,” adds Nguyen, CEO and chairman.

AlthoughVinaCapital’s flagship fund, Vietnam Opportunity Fund (VOF) has dropped 41.5% this year, compared to 58% for the benchmark Vietnam Index, the fund’s head of investments, Andy Ho remains upbeat.

“On balance, we still believe strongly in Vietnam’s medium and long term growth trajectory, and so it really a case of waiting out a rough patch that is essentially a series of economic growing pains comparable to those experienced by many developing nations, such as India and China,”says Ho.

Among the line-up of Vietnam funds, large and small; new and established, the consensus is in: there are still plenty of global investors who are banking on this country’s re-emergence as a stable economy with a growth trajectory that will be the envy of most nations.