Vietnam's Emerging Market: An Asian Value Play

by Tony D'Altorio

Vietnam's Emerging Market: An Asian Value Play

by Tony D'Altorio, Investment U Research

Monday, December 6, 2010

In a recent Investment U article, Karim Rahemtulla highlighted several countries likely to spearhead the next emerging market wave.

He included the Asian nation of Vietnam to that list, and with good reason.

Vietnam most certainly is a fast-growing emerging market. In fact, its stock market trades at such impressive levels that it appeals to value investors like famed emerging market investor Mark Mobius.

Mobius calls the country's stock market one of the world's "cheapest." He also admits to "finding lots of bargains" for his Templeton Asset Management funds, which are well known as value investments.

In other words, Vietnamese stocks should pay out nicely... for those with a little patience.

Vietnam's Stock Market Valuation

Stock markets across Asia have shot up on hot money flows from western investors. But Vietnam remains at bargain basement prices.

Its benchmark VN index already fell 14% this year on inflation concerns, a weakening currency and a sizeable trade deficit. That leaves it still 67% below its 2007, all-time high.

Right after hitting that record, inflation began spiraling upward and global financial turmoil sent foreign investors running for cover. Most of them haven't gone back since Vietnam's investment bubble blew later that year.

So its stocks remain among the cheapest in Asia today.

According to PXP Asset Management, Vietnam's market is trading on a 2010 forecast price-to-earnings ration of 10.6. Compare that to Thailand's 14.4, Indonesia's 17.4 and the Philippines' 18.6.

Since Vietnam's market first hit global investors' radar screen in 2006, it has traded between 8 and 35 times earnings. So it's definitely trading near the low end right now.

Add to that how Vietnam's economy is forecast to grow at the third-fastest pace in Asia, after China and India. And companies there expect an average 27% growth in earnings per share.

As Bill Stoops, chief investment officer of Dragon Capital noted, "The market has come down a lot but earnings have been holding up."

Vietnam Is Still a Frontier Market

Despite those bargain prices, the hot foreign institutional money still won't bother with Vietnam. That's partially because of its market size.

The VN only has eight stocks with a market capitalization over $1 billion. This raises worries about liquidity and institution's liquidity and ability to get their money out.

Corporate governance abuse and poor financial reporting standards certainly don't help either. Nor does the worryingly high tolerance of debt among management there.

For instance, Moody's recently warned about the uncertainty surrounding the debt repayment by Vinashin, the state-owned shipbuilder. The ratings agency said that problem is damaging other state-owned enterprises' reputation there.

Analysts also worry about the country's macro-economic stability. The annual inflation rate is once again approaching double digits and foreign exchange reserves are low.

And then there's the Vietnamese currency - the dong - which has been devalued three times against the U.S. dollar since last November. Even today, it's still trading significantly below the official exchange rate in the black market.

Vietnam's Future

Despite those issues, outsiders have begun noticing Vietnam's stock market again.

Foreign trading volume picked up over the past few months from its two-year, daily average of 5%. Over the past couple months, overseas investors' share of the daily trading volume jumped to 15-20%.

Perhaps they believe Vietnamese stocks are just too cheap compared to the rest of Southeast Asia. Or maybe they expect the local government to become serious about reforming its state-owned firms.

To be sure, those stocks are probably unfairly marked down right now. And while there aren't any quick bucks to be made off Vietnam right now, patient value investors can do quite well all the same.

Better yet, there's an easy way to buy it up through MarketVectors Vietnam (NYSE: VNM).

The ETF has about 68% invested directly in Vietnamese companies. It then divides the remainder into companies around the globe that do significant business in Vietnam.

In the end, Vietnam should prove the slogan true: All good things come to those who wait.

Good investing,

Tony D'Altorio

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