Fig 1. illustrates the development of the coronacrisis in Vietnam. At the time of writing there have been no community infections for over 50 consecutive days. In total there have been 1169 recorded cases and the death toll remains at 35. Prior experience with SARS almost 2 decades ago and an early and aggressive approach to testing, the encouragement by the government of solidarity and collective action as well as favourable demographics probably all contributed to this result which stands out versus many other countries in the region.
The lockdowns and other interruptions to most of the economy have been localized and brief with the notable exception of businesses reliant on foreign visitors. This has meant for many an acute impact on earnings in q1/2 which has somewhat subsided though consumer sentiment is at around a 20y low according to Infocus Mekong Research, due largely to reduced socializing and financial reasons. Yet the trade surplus was at a record high at the end of 8 months as imports have fallen and share of the global export market risen. The Government has taken steps to assist with meaningful adjustments in monetary policy as well as fiscal easing, ensuring favourable lending conditions as well as prioritizing infrastructure projects which had been on hold for some time.
While the size and velocity of the local stock market are superior to many regional peers Vietnam retains frontier status with the index providers (Fig 2). The most often mentioned obstacle to Emerging Market status is the issue of foreign ownership limits (FOL) and the lack of transparency to end investors of the foreign stock premiums generated by this.
Simply put, when the FOL is reached a foreign investor can only buy from another foreign investor via a local broker. As only these parties will know the premium paid, a lack of market transparency is introduced. In nearby Thailand where similar ownership issues prevail Non- Voting Depositary Receipts offer this and have done so for 20 years. Legislation allowing the issue of these has been passed in Vietnam and could be implemented in 2021, though technical and administrative issues are likely to delay their issuance. Our guesstimate is that this will not be before 2022. Prefunding, clearing, settlement and transferability issues will likely be resolved also, increasing the possibility of an upgrade or placement on a watchlist in this timeframe. In the meantime certain legitimate routes to investment in local stocks are available which offer a compromise, including ETF and bespoke fund structures both of which Dragon Capital Group is able to offer to qualified investors.
Dragon Capital entered the coronacrisis positioned mostly in the mid-section of Fig 3 which represents the core themes we have been investing in for many years. We view these as the most investible in the economy of Vietnam, and with scaleability. The net result is that after an uncomfortable March the equity market has recovered in most of the areas of medium to low risk of long-term harm and significant adjustments in holdings were deemed unnecessary. While it would be misleading to suggest we have not had to adapt to new and difficult circumstances and while some of our investee companies are facing headwinds, the investment team have focused on cleaning up portfolio construction rather than seeking to change the underlying composition.
Dragon Capital Group offers a variety of public and private solutions to potential investors in Vietnam depending on their size, interest and risk tolerance. These range from managed accounts, a UK listed closed ended investment trust (ticker VEIL.LN), a Dublin listed equity UCITS fund and a fixed income fund also listed in Dublin.
Viet funds management or VFM, a Dragon Capital group company and the largest domestic asset manager is also able to offer locally listed ETF’s one of which, the Diamond ETF, focuses on stocks at their FOL, and the other of which aims to track the VN30 index. Together they make VFM the largest ASEAN ETF issuer.
The views expressed in this article should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. Nothing in this article is intended as an offer or solicitation for investments in Dragon Capital group funds or products.
Past performance is no guarantee of future returns. The price of funds and the income from them may fluctuate upwards or downwards, and cannot be guaranteed. The data in this presentation has been obtained from sources we believe to be reliable, but we cannot guarantee or be responsible for their accuracy or completeness. Unless otherwise indicated, all information is current as at 30 October 2020.