Disconnect? Or never connected in the first place

There is an ostensibly curious chasm at present between a booming Vietnamese economy on one hand, and the soggy start to 2015 for the nation’s stock market – the VN-Index is flat ytd, the VNAS is down 2%, and the FTSE Vietnam All Share (in USD) is down 3%. A list of economic positives that qualify as “new” over the past three months includes the following five:-

1) A rising bias to GDP growth: Both the 1Q15 outcome (6.0%) and several FY2015 forecasts (some now as high as 6.5%) are moving higher compared to prior expectations.

2) A recent visit to Vietnam by this writer found several visible signs of improved consumer sentiment compared to five months before, and this is corroborated by 1Q retail sales growth of 10% YoY. Restaurants were fuller and retail footfall seemed higher – more than at any point in the past five years.

3) Further data suggesting that Vietnam’s property market recovery that started in 2H2013 is continuing: Transactions have trebled YoY in 1Q and business registrations in the sector are up c. 50% YoY.

4) Signs of incremental government reforming continuing, particularly in three areas – banking; state owned enterprise (SOE) privatisation; and new laws concerning property, investment and enterprises.

5) Further falls – to under 1% – in inflation, enabling further reductions in local interest rates and looser credit conditions. The banking system’s average lending rate was 10.1% in 1Q15, down 1.4% YoY, and loans outstanding in March were c. 17% higher YoY.

So why is the market not matching this positive real economic news?

First, the economy is not the stock market. The world over, a nation’s GDP growth is not significantly correlated (even over rather long time periods) to its stock market’s performance. This renders the first two items above as – while possibly helpful – for the most part irrelevant. Why? Because underlying earnings per share, and the sharply variable extent to which they are used in outside minority shareholders’ interests, is the real beef. EPS growth doesn’t correlate well to GDP growth – profits are but one component of GDP, and the changing ways a given company is governed are generally a far more important determiner of underlying EPS growth. Moreover, in Vietnam’s case, success in attracting major foreign direct investment (1Q disbursals up 7% YoY to USD3bn) at such an early stage of economic development is certainly transforming the economy, but this driver is by its very nature (mostly 100% owned foreign businesses) quite separate from the local stock market.

Next, the fourth positive offered above is actually a glass half full or half empty conundrum. Yes, it is good that the government is keeping up the stream of SOE stock sales (289 of them targeted for 2015 -maybe not an achievable number, but good to be ambitious), but minority stake sales do little to transform these businesses and improve their management. Banking sector reforms are continuing (eg, the sound measures in the government’s Circular 36), but a high level of NPLs remain in the system, some USD6bn of which (as of YE14) the government has yet to do anything with except warehouse them for the banks (with the banks still liable for them). Finally, regarding the new property, investment, and business laws, it is still too early to tell how big an impact they will have. A vigorous debate between the reform “half-fulls” and “half-empties” would still, sadly, favour the latter.

This leaves (3) and (5) as the fresh, relatively unambiguous bull points for Vietnamese equities. If property continues to get healthier, this is supportive to equities; these two asset classes typically travel together. Low inflation should mean further falls in interest rates, a central building block for higher equity valuations.

So in some cases, never connected in the first place. In other cases, a disconnect that will not last for too long. Despite the year’s underwhelming start for the Vietnamese equity market, patience is likely to be rewarded as the year plays out, making four straight years of rising stocks.

Mekong Man

QE in VN?

In a one-party state with no independent central bank, it is to be expected that de facto “quantitative easing” of the money supply has regularly taken place. This would be reflected in government deficit spending not being fully financed by either marketed bond issues or loans, so therefore to some extent by the central bank. According to the IMF, the past three years` annual Vietnamese government net borrowing requirement (a proxy for the budget deficit) has been running at an average of 6.3% of GDP; this has mostly (c. 80-90%) been funded inside Vietnam and the rest externally, but MM hasn’t found enough historic data to say how much of the internal funding has successfully come from the market, and how much via the back door from the central bank.

Western and Japanese QE over the past five years has been all about stimulation at the top of the pipe, i.e. the central bank explicitly buying government debt. It hasn`t resulted in incremental CPI inflation partly because the lower-down parts of the pipe, like loans from the banking sector into the real economy, have generally remained very sluggish; moreover the leaks in the pipe, like money flowing off into risk assets like emerging markets, are prominent.

In Vietnam over 2000 – 2010, it is clear that the lower-down parts of the pipe were flowing fast: bank lending grew at a CAGR of a mammoth 32%. This, regardless of the inadequate data at the top of the pipe, was enough to stoke major asset price inflation (for example, a quadrupling of property prices in the four years to 2007) and two big bouts of inflation – one that peaked at 28% in 2008 and a 23% peak in 2011.

As with the underlying asset value inflation generated by western QE, inflationary episodes in Vietnam have exacerbated inequality: this is because of the large number of hand-to-mouth poorer people, the heavy weight of inflation-prone food in total consumption, and the superior inflation-hedging abilities of the rich. This said, in general Vietnam continues to be characterized by lower inequality levels than many other countries, which makes it more akin to a Switzerland or Scandinavia than a Thailand, China or US:-

Gini coefficient for income (Lorenz curve)* – 15 nations, ranked

Sweden           25      Relatively very equal, like all Scandinavian countries
Germany         31
Switzerland     34
India                34      Shows up as more unequal on different methods

Vietnam           36      Probably the 3rd most equal major country in Asia

Japan              38       Can show up as less unequal on different methods

Indonesia        38
Whole world    39
Thailand          40
Russia             40       Looks low – oligarch offshore money not included?
USA                 41       World`s most unequal major developed nation
China               42
Philippines       43       With China, among the most unequal in Asia
Nigeria             49       Very high inequality, like most of Africa
Brazil               55       Very high inequality, like most of Latin America
South Africa     65       World`s most unequal major nation

*A scale of 0 to 100, with 0 representing perfect income equality of all citizens, and 100 representing the total inequality of one person having all of the country`s income. Sources: 2014 UN Human Development Report; World Bank Gini Index, Feb 2015


Is openly practiced QE at the top of the system, by explicit central bank buying of government debt or even by it posting cheques to all citizens, appropriate in Vietnam? Hell, no. Vietnam is a growth story, not a case of European or Japanese stagnation. In addition, you can only “do QE” successfully when you have lots of credibility built up over a long time. So, credit to the Vietnamese government for clamping down on inflation since 2011 by reigning in system loan growth to an annual average of just 12% over the past four years. This, with the strong balance of payments picture, has resulted in an impressively stable currency, in fact a strong one – the dong`s real effective exchange rate (as measured by the IMF) rose 15% in the four years to year-end 2013 (with more still in 2014). A good start to growing long term credibility indeed.

Mekong Man