Vietnam is attracting investor attention for the way in which it has contained the Covid-19 crisis. Bill Stoops, chief investment officer at Dragon Capital analyses the investment prospects. What is your investment outlook for Vietnam over the coming 12 months? For the balance of 2020, clarity is starting to emerge. Thanks to successful Covid-19 containment, Vietnam has fully re-opened, except for in-bound travel and tourism. The domestic economy is functioning again, and exports are ticking over too, being only -1% YOY in 1H20. The trade surplus actually rose 150% to $4 billion, and the currency has been stable at VND23,200 : $1. Foreign Direct Investment (FDI) is down – by 5% for disbursed and by 15% for registered – but that may be transient. And renewed infrastructure spending of $30bn is planned over the next two years as a fiscal stimulus. So, Vietnam should be able to generate positive 2020 GDP growth in a range of 3% to 5%.  With all that, we forecast the market’s float-adjusted earnings at -1%, putting the PER at 11x (non-adjusted gives -11.5% / 14.5x).  And if foreign flows do not plunge again globally, the VN Index should be able to hold the 850-900 it rebounded to, from 650, when the world rallied after March.  In 2021, matters depend on how long Covid-19 persists internationally. If it lasts, and sends the world into sustained recession, Vietnam’s exports will slump chronically, as will FDI, and that will erode the buffer that a robust domestic economy offers to negative externalities. But, with the resiliency described above, there would be good grounds for thinking that Vietnam can bounce back more quickly than many other emerging markets once Covid-19 is finally over. Which asset classes are you identifying as the best opportunities in Vietnam and what are the prominent sectors and themes?   Dragon primarily invests in one asset class, which is equities, and Vietnam’s equity market mostly reflects the domestic economy. We target the main long-term forces driving the domestic economy which are centred on development of the middle class. Our analysis indicates those forces to be: (i) Consumption;
(ii) Financial services; and
(iii) Urbanisation.  Within them, we believe the most dynamic sectors are retail and food & beverage, banks and property, transport and construction materials. Within those sectors, we try to select the companies which best capture underlying growth. Some of the companies we like have been unduly punished by Covid-19 and offer exceptional value for growth at this time. What are your top three investment concerns? (i) Covid-19 is the key concern now. Vietnam has contained it, but there is still the question of how long it will last in the outside world, and the impact it will have on exports and tourism. Although the domestic economy is robust, it will always be vulnerable to any sustained slowdown in exports, and while tourism is a less important component of GDP, it is not trivial. There has already been fall-out for the spending power of people employed in these industries. (ii) The infrastructure programme failing to develop in the way that is needed not just to offset Covid-19 (as a fiscal stimulus), but to ensure that the country’s structural rate of GDP growth is maintained at ca +7% (because it no longer suffers transport bottlenecks and power shortages). (iii) We do not foresee other risks that would be seriously disruptive to Vietnam. Our concerns would instead be that opportunities such as US-China trade wars, or the free-trade agreement with Europe, have less far-reaching benefits than expected. 2020 was marked as the breakout year for Vietnam (i.e. MSCI potentially adding the country to a watchlist for potential upgrade to emerging market status) until Covid-19 struck. What impact has foreign panic selling had on markets? Dragon has never believed that Vietnam would go into the MSCI-EM indices before 2022 but it did believe that after consolidating since 1Q18 in the 900-1000 range, the market was overdue for a breakout based on fundamentals. However, Covid-19 has forestalled that outcome for now. Foreign “panic-selling” was the most important factor in bringing the market down to its low of 650, and in February-March, the net foreign outflow approached $800m. Local retail players, however, only net-sold about $130m, and towards the end of the period, there were large insider purchases and treasury buy-backs of approximately $700m. This combined with the global rally push the index to 850-900. Foreigners returned and there was a landmark deal when KKR and Temasek invested $650m into Vinhomes, the big residential developer. At present foreign flows are neutral. © 2020 funds global asia