Vietnam is the most exciting frontier market in Southeast Asia, a nation of 93 million people whose lives are being transformed by its economic doi moi programme.
Vietnam endured decades of civil war and foreign occupations by colonial France, the Imperial Japanese Army, the US and even Deng Xiaoping’s China Vietnam is also the gateway to the Mekong Delta and offers the lowest cost, educated, technology work force for Japanese, South Korean, Taiwanese, German, Chinese and US investors due to its pro-business foreign investment programme. Vietnam is also a classic expanding consumer economy with youthful demographics, accelerating urbanisation rates and a rise in per capita disposal income.
Vietnam’s stock market VN Index has fallen by 22 per cent since it peaked in April. It now trades at 14.6 times estimated 2018 earnings, down from a multiple of 20 at its early April peak. In most emerging markets, such a valuation hit is a symptom of systemic financial crisis, as proven by recent events in Turkey, Argentina, Brazil and Pakistan. However, this is not the case in Vietnam. Earnings growth of 15 per cent is powered by largely domestic spending, not just export growth. The ruling Communist Party is committed to the privatisation of state assets. Vietnam now has lower wages for factory workers than China, making it a magnet for foreign direct investment by both Asian and US multinationals.
The Vietnamese government has lifted restrictions on foreign investment and chipmakers. Samsung and Intel have made multi-billion-dollar investments in next-gen manufacturing plants. Vietnam’s economic trajectory is reminiscent of China’s opening under the late Paramount Leader Deng Xiao Ping (“to get rich is glorious, it does not matter whether a cat is white or black as long as it catches mice”). In the last decade, GDP growth has averaged 6 per cent per annum while per capita income has tripled. The Vietnamese dong has been stable against the currencies of its main trading partners. True, King Dollar, rising US dollar interest rates and a Washington-China trade war could hit the Vietnamese stock market this autumn but we are now near the point where the risk-reward calculus is skewed in favour of the bulls, not the bears.
The Philippine stock market initially surged after the election of President Rodrigo Duterte, who benefitted from the macro reforms, increase in the tax rate, public spending deficit and reduction in sovereign credit risk engineered by former president Benigno Aquino. Yet the Philippine stock market, sovereign debt and the peso have not escaped the brutal selloff in Asian emerging markets due to trade tensions, a strong US dollar and monetary tightening by the Federal Reserve.
Second-quarter GDP has slowed by 0.3 per cent in the Philippines, a bad omen for the future. The Philippines is also expensive at 17.4 times earnings, a valuation multiple that can easily derate if economic growth disappoints again. Of course, if the growth slowdown is protracted, the Manila central bank could cut policy rates, a scenario that will mean a softer peso. This could mean the Philippine stock market index corrects to 7,000. Value exists in Vietnam but not in the Philippines.
Turkey’s financial turmoil has left emerging markets at their cheapest valuation level since early 2016, when a botched Chinese yuan mini-devaluation triggered contagion across the asset class. The MSCI emerging markets index now trades at 10.8 times forward earnings. Macro risks like a strong US dollar, a hawkish Federal Reserve and political shocks will continue to pressure specific markets like Brazil, Russia and Argentina, the indiscriminate sell off in the asset class has created opportunities in specific countries where the fundamental outlook and the risk reward ratio has moved in the investors favour. Take Mexico, for instance. President López Obrador wants a negotiated Nafta deal with the US since 80 per cent of its exports are headed north of the Rio Grande.
Russia is also extremely cheap at only six times earnings and a dividend yield of 6.8 per cent, though the Russian rouble fell on contagion risk from the Turkish currency crisis due to fears of fresh Congressional sanctions to punish the Kremlin for election cyber espionage and the Sergei Skripal poisoning case in Britain. Yet Russian equities will remain hostage to political risks and a bull market in Moscow is impossible without stability in the rouble.
Financial stocks in India, notably its leading private bank ICICI or Taiwan’s semiconductor/memory shares offer both inexpensive valuations and earnings growth potential. Turkey, Argentina, Venezuela and Nigeria, unfortunately, remain emerging markets where investment risks are far too high, making them no go for now.