Follow Kazakhstan, Vietnam

Sacha Baron-Cohen’s Borat may well have reduced Kazakhstan to an international joke, but there is nothing to laugh at this week in the news from this frontier market. The government there has announced that it will sell 25%+ stakes in up to 60 of its biggest state owned enterprises, that in some cases it will give foreigners a majority stake and invest alongside them, and will be setting up an international financial centre operating under UK law and modelled on Dubai. The businesses to be privatised include oil and gas, telecom, railway, and nuclear power. The timetable looks serious and tight.

Necessity is the mother of strong action and Kazakhstan indeed is facing great difficulties: its currency has fallen by a third since August’s renminbi shock, major export customers Russia and China are both on their backs, and its GDP growth this year is plummeting to about 1.5% after the 4-8% range of the past five years.

In this sense, Vietnam suffers from a lack of necessity, since it still rollicks along at 6+% GDP growth even with its large and inefficient state owned sector that continues to account for nearly a third of GDP. To date, this has meant that Vietnam can be cautious about radical economic restructuring, or even avoid it altogether.

Of course, we have had good policymaking news in Vietnam just recently, and this is to be warmly applauded. However, the essence lies in the timetable: if ten leading SOEs are indeed going to be sold, there is a big difference between “vision for 2030” (as one of the government announcements mentioned) and “by 1H2016, applications to be global book runner due this month please” (as MM suggests the press release should read). When the biggest of these ten companies, Vinamilk, says “we would like to interview potential investors to assess what they would bring to Vinamilk”, there needs to be a top politician immediately responding “with respect, Vinamilk, these are our shares, not yours, you carry on milking the cows while we crack on with the share sale”.
(And then when the placement is done, the new investors will be asking what you are bringing to them, not vice-versa.)

One can plausibly hope that the next ten years in Vietnam will achieve more in terms of SOE diminished importance (in the last ten years, the reduction in SOEs’ share of GDP has only been 3 percentage points, from 35.5% to 32.5%, according to CEIC), for the following three reasons:-

1) A fresh “mandate” (heavy on the quotation marks !) for the faction of Prime Minister Dung in the upcoming Communist Party Congress in 1Q2016. This is likely, we think, to favour modernists and economic reformers.

2) The discomfort of rising government debt ratios during a coming phase of rising global interest rates, reduced overseas development assistance for Vietnam, and the reaching of a level (public debt including guarantees nearing 65% of GDP, plus a large swathe of other SOE debt) beyond which Vietnamese bond and equity markets would get justifiably jittery.

3) The recent slew of free trade agreements, especially the TPP, which will add to pressure on SOEs from the gradual removal of their advantages of favoured treatment from Vietnamese government and bankers.

Yak Shay Mash !

Mekong Man

Vietnam Bull-Bear

The Vietnam stock market is in a phase of listless turnover lacking direction. The indeterminate direction has ruled for almost two years now since the start of 2014, after the strong bull run of 2012 and 2013 that followed the bear market of 2008-2011. Perhaps, then, it is an instructive time to play “Bull-Bear”, the process of listing out key long term bull points and bear points for the market. The stress here is on long term: the process can of course be done based on shorter term considerations, but MM’s investment horizon is a long term one of two to five years. This is the best horizon to have for sustainable long term superior investment performance.

For the record, USD index returns for seven regional markets since 1/1/14 and 1/1/15 are as follows (ranked from best to worst over the longer period). Vietnam is middle of the table since 1/1/14 and best (or rather least bad) since 1/1/15:-

Since 1/1/14    Since 1/1/15
China (Shanghai Composite) +38%              -11% (-42% from June 2015 peak)
India (BSE 500)                      +29%              -3%
Philippines (PCOMP)             +11%               -7%
Vietnam (VN Index)                +6%                 flat
Thailand (SET)                       +1%                -18%
Indonesia (JCI)                       -15%               -29%
Malaysia (KLCI)                      -33%               -25%

We believe the Vietnam bull points cited below comfortably outweigh the bear points. But giving careful thought to both sides of the argument is a good idea for any investor, so our main purpose here is to provide the main points and let the reader think, rather than try to construct a robust demolition of the bear case.


* Foreign ownership limit changes are on the way, which will add a number probably in the single digit billions of dollars to the effectively-foreign-investable market cap – out of Vietnam’s total current market cap of $55bn and free float of perhaps $25bn. There should be by year-end 2016 a few hundred, possibly a majority, of Vietnam’s c. 800 listed stocks open to unlimited foreign investment.

* The Trans-Pacific Partnership trade and investment treaty will get completed before Obama leaves office, and this will have strongly positive growth and reform implications for Vietnam. Such implications are stronger for Vietnam than for any other signatory. It has the potential to turn Vietnam into a “stunning growth” economy (>7% pa on MM’s scale) from just a good one (5-7%).

* At under 11x, Vietnam’s trailing PER is modest. This places it in the bottom valuation quartile of national stockmarkets worldwide.

* Vietnam is a strong, long term economic growth story, is not overly sensitive to China’s growth slowdown, and remains in an EPS growth phase that began in 2H2012. Although having various commodity industries, it is not a “commodity play” with the volatility and transition challenges such a status entails. Its openness to foreign direct investment, and its attractiveness to such investors, makes for a durable growth trajectory.

* Vietnam is developing relatively broadly, not narrowly, with a noticeably low gini coefficient (a measure of income inequality) by global emerging market standards. Basic educational standards are quite good, relative to GEM and indeed the whole world.

* It is entering a long term sweetspot – historically positive for stockmarkets globally – of a rising mass middle class, which might triple to 33m people over the next five years. This makes for fertile investment ground in bellweather consumer-related and residential property-related sectors.

* The four year old banking crisis has effectively been grown out of. Healthy mid-teens percent annual credit growth has resumed. This is important because healthy banking is a necessary condition for successful and sustained economic growth.


* Vietnam’s stock market size is relatively constrained at less than 30% of projected 2015 GDP. There are two main reasons for this, a “good” reason and a “bad” reason. The good reason is that Vietnam’s wide opening to foreign direct investment at an early stage of economic development means that foreign presence in the economy is greater, relatively, than in most other Asian emerging markets historically. This keeps certain sectors from being as domestically owned as would otherwise be the case. The bad reason is that the government has not showed any real vigour or competence in turning state owned enterprises into private, listed ones.
The bull’s rejoinder: there isn’t a good one on privatisation; we need much better progress here. On the FDI presence, the good rejoinder is that this eventually spawns high quality local businesses that are linked to it, staffed by talented, foreign-trained people.

* Ultimately any one party state implies the existence of a thinly based and capricious legal system. Democracy really is better not just because it’s nicer – but because it’s better for long term investment returns and wealth creation too. The well-rehearsed reverse case of China v India 1980-2015 really is the exception that proves the rule, not the basis for an alternative theory of the world.
The bull’s rejoinder: Vietnam’s government understands the value of stable and robust business law, and TPP will reinforce this by the overlay of international law.

* Vietnam’s public finances are consistently badly managed. An annual deficit of c. 5% of GDP each and every year might, post the 2009 western financial crisis, not sound so bad. But it is so: and the contrasting cases of almost all East Asian nations’ development in years past proves it. Yes, it could be worse; but it could also be alot better.
Bulls must simply nod and keep quiet here. Their only case is a divinely sourced forecast of improvement.

* The SOEs’ major presence – producing a quarter of national output and using two fifths of national credit – remains a large, crowding-out drag on the economy. It is also worth remembering, even in the current phase of near-zero inflation, that such a presence effectively causes a poor inflation record over time, via a poor capital-output ratio, high resulting debt ratios, and a pliant central bank easing away such debt through inflation to avoid an SOEs’ bankruptcy crisis. All the zeros on dong prices are testament to this history.
Bulls: improvement coming? (Maybe, but we’ve heard this record before.)

* As good as Vietnamese basic education is, its tertiary education is hopeless. There isn’t yet even one or two outstanding local universities that wealthy-enough Vietnamese would choose over a foreign university.
(Vietnamese) Bulls: “Oh, my son, have you studied for your SAT yet today?”

* Corporate governance on the whole remains at an inadequate level. Perhaps a case can be made it is improving, but equally skeptics have plenty of examples to cite. The continued large size of the SCIC is one culprit – this body should be a consistent divester, but isn’t (see last week’s MBB equity issue); it even has the cheek to call itself a “sovereign wealth fund”, a supreme bastardisation of the term.
Bulls: the march of time moves us in the right direction.

* Interest rates have bottomed. A very simple rule of thumb not to be sniffed at (though not a cast-iron truth) is that stock markets do well as rates fall, and badly when they rise. If they rise from here in a major way, this is a clear negative.
Bulls: they’ve bottomed, but are likely to stay broadly low and stable rather than shoot up; note that Vietnamese rates are still higher than most regional peers and also far from low in real terms (amid near zero inflation and 2% core inflation).

Mekong Man