Vietnam Uncorrelated: a useful thing when “Mayday” strikes

In a highly linked world, it is wise for a portfolio to have some minimally correlated elements.

Five year historic data shows a correlation between the MSCI Emerging and the MSCI World of a fairly high 64%. The figure for Frontier versus World is, in contrast, significantly lower at 28%. One of the lowest within the Frontier category is MSCI Vietnam at only 3%: basically totally uncorrelated. Vietnamese correlation with both the S&P 500 and MSCI Emerging is also virtually totally absent, at 1%. This makes Vietnam a significantly less world-correlated market than, for example, Nigeria (22% to MSCI World), Kazakhstan (29%), or Kenya (22%). Choosing a different index, this time the VN-Index, makes little difference: its correlation is only 16% to MSCI World, 13% to Japan’s Nikkei, 14% to the S&P 500, and between 8-22% to other Asian markets. In contrast, relative to the S&P 500, Brazil (72%), China (63%), and Indonesia (46%) are fairly strongly correlated.

So Vietnam stands out globally, and within the major frontier and emerging markets, as a distinctly uncorrelated place. Why? Four possible reasons are:

  • The still semi-closed capital account. Capital can’t wash in and out so easily here as elsewhere.
  • Restricted foreign liquidity due to foreign ownership limit and paucity of attractive big-cap stocks.
  • Local factors, such as government reform orientation, are the more important market drivers compared to global ones. This makes sense in a place where strong economic advancement appears a destiny (this is East Asia after all), but where the main brakes to progress have been exerted by the Vietnamese one party state.
  • Vietnam’s performance in world trade and inward investment is, at this stage, a story of structural market share growth, rather than simple dependence on the demand or financial conditions in other markets. For example: Vietnam’s export performance has continued to power ahead post the global crisis even in initially weak markets like the US, EU and Japan, because the effect of Vietnam taking market shares from others is far more important than the overall market growth for the given products in those places. Another illustration of this is the currently rising GDP growth trend in Vietnam, versus the falling one elsewhere in the emerging and frontier world.

Why, apart from normal risk management considerations, is it good to be uncorrelated right now?

  • Dynamic America is once again leading the western world out of recession, meaning once again, the dollar is king. The good news here for Vietnam is that the country on the whole is still so cost competitive, that its own currency need not sink so much against the dollar as is the case for other emerging countries. This means less currency risk in this market for dollar-based investors.
  • That big sucking sound of capital pulling out of emerging markets is something Vietnam is less vulnerable to than others. Reasons for this include the prevalence of relatively sticky inward remittances from overseas Vietnamese and FDI (a chunky USD 12bn pa or so each for a USD 200bn-ish GDP economy) in the overall balance of payments, the partially closed capital account making the inward-outward capital tide less severe, and the country-fund-dominated nature of the Vietnamese stock market (again, sticky).
  • Some of the most prominent markets in the world seem dicey at present. America has momentum on its side but it isn’t cheap (19x trailing on the S&P 500), China looks overbought (22x, Shanghai Composite), India expensive (20x, BSE 500), and Russia dead for good reason (5x). The major eurozone markets have some momentum, but are in a currency facing structural weakness.

In such a world, to allocate something to an uncorrelated market with a good story seems eminently sensible: make it Vietnam.


Mekong Man

Thump Thump

Ian Gisbourne of UBS has published a 50-page thumper on Vietnam macro. It reads well. Here are some of the more notable points in it from MM’s viewpoint:


  • Internet penetration in Vietnam is quite high: at 44% as of mid-2014, third highest in Asia after Malaysia (67%) and China (47%). This is quite remarkable for a country towards the tailing end of GDP per capita in the region, and speaks well to Vietnam’s relatively good basic education and proactivity to modern trends.
  • Vietnam is the only market in Asia still about half off its all-time high (which was 2008 in Vietnam’s case). Simple metrics like this are always noteworthy.
  • A reminder that TPP, should it duly happen, will be more beneficial for Vietnam than for any of the other 11 countries. The study cited in the report shows a 14% uplift to GDP eventually emanating from TPP for Vietnam, at least six times bigger a boost in relative-to-GDP terms than for any other signatory.
  • Speculation on the stock market foreign ownership limit is back on the front burner again. Of course disappointment at nothingness has been the result on this for years already, but perhaps this time there really is something in the air. Gisbourne cites the logic of a Thai-style NVDR system (long MM’s favoured route). Other commentators such as SSI are talking about a limit-free environment for shares except in the specific sectors of banking, insurance, telecom, pharma and security. Both of these seem more sensible than the previous suggestion of a 60% limit, which to MM had no policy making rationale.
  • The possibility of an MSCI upgrade from “frontier” to “emerging” is also mentioned. MSCI typically reviews markets each June for a possible move 12 months hence. When this happens (it is only a matter of time), it will have a big positive market impact. The problem is that the criteria are qualitative/subjective, so it is difficult to do anything other than speculate on the timing of this.
  • The report of course alludes to the de rigeur universally acknowledged weak points of the banking sector NPL issue and the slowness of SOE reform. UBS avoids dramatic opinions on these thorns (daggers?). In coming articles MM will attempt to stick his neck out on them.
  • There is a raft of handsome-sounding reforms this year on enterprise law, property ownership, red tape, and bankruptcy law. It is difficult to assess their impact, because of the one-party system and associated implementation doubts. Progress on these is worth watching to assess their true import.
  • The final takeaway from the report is one that is not mentioned in it. Has this ostensibly uncommercial thumper been produced to help UBS’s investment bankers steal the rug out from the more-established-in-Vietnam CSFB to win the next big lucrative Vietnamese capital market deal or deals? Another sovereign bond issue on the way following last November’s 4.8% coupon success; trying to be a player in the not-too-distant Mobifone sale – these two possibilities spring to mind.


Mekong Man