Peter's Perspective
10th June 2015 by Peter Churchouse

Back in ‘Nam

Some of our readers have very different experiences and memories of Vietnam than me. I am hugely grateful not to have been caught up in the conflict of the 1960’s and 1970’s that destroyed so many lives.

No, my experience of the country has come in recent years as a yachtsman, a visitor, and of course, as an investor.

In May 2014 we recommended a specific Vietnam investment to our subscribers.

The vehicle of our recommendation has been through some significant restructuring, so last week I went back for a few days to Ho Chi Minh (Saigon) to investigate. (Subscribers to The Churchouse Letter will receive a separate update soon).

It was an opportunity to revisit the country, and reassess our view.

And of course, wherever possible we put “boots on the ground” in our research. I have a lot of great contacts who are al well entrenched in the local markets.

When it comes to emerging market investing, this is invaluable.

Let me back up to where we were when I last visited.

A year ago, the banking sector was in dire straits, almost in crisis. Non-performing loans (NPLs) were high and banks simply were not lending to business. Credit markets were virtually frozen.

Now? Recapitalisation of the banking sector has been taking place (albeit slowly). And credit growth was up about 17% annually in April. This suggests a pickup in both the economy and the real estate sector.

How about the ‘boring’ statistics that guys like me find interesting?

  • GDP growth has accelerated to 6%, the highest in seven years.
  • Retail sales jumped more than 9% for the first five months of the year. The consumer confidence index is at its highest since 2010. Consumers are loosening their wallets.
  • Industrial production is rolling along at around 9.5%.
  • Auto sales are booming, up approximately 70% on a year ago.
  • Inflation is under control. Now around 2% down from 20% in 2011. This gives the central bank a lot more leeway on interest rates and credit growth.
  • Foreign Direct Investment (FDI) continues to pour in. My friends at Viet Capital tell me that Samsung now accounts for 20% of Vietnam’s exports and are in the process of investing $1.4 billion in further manufacturing plants.
  • Privatisations of state owned enterprises (SOE’s) has resumed.

This is a GROWTH ECONOMY right now…

On my last visit Saigon’s property markets were gloomy.

What a difference a year makes.

Transactions volumes in the city’s housing market have risen by 80% to 90%. But prices have not moved much, if at all.

Those kinds of volume increases suggest prices rises are not far behind.

Little new construction was commenced in the 2012/13 dip, which means low levels of supply/completions today.

And today, for the first time ever, Vietnam households actually have access to traditional mortgage, standard mortgage finance.

Rates at 9% to 10% are still high, but 20 year mortgage funding is now possible for home buyers. That should boost demand.

And from July, foreigners will be able to own residential property openly for the first time. Could a rental yield of 8% – 9% for high end property prove attractive to some? I suspect so. (Disclosure: I have my eye on some real estate there).

But the office market is still soft. Rentals are still edging down and vacancies holding in at a balance sheet hurting 20% or more.

The empty, part-finished now on hold, forty storey office building across the street from us at the Viet Capital office was a stark reminder of problems in this corner of the market.

There are other areas of concern.

NPL’s, whilst in better shape than before, remain a concern.

And ‘policy’ remains firmly ‘emerging market’… it’s still a quagmire of indecision, corruption and self-interested politics.

Some signs of reform are emerging, but it is a painful process.

The authorities have promised to lift the foreign ownership limits of shares. Supposedly this is in the legislative pipeline for July.

Well, we heard similar tales more than a year ago… and I am just as skeptical now as I was then! I’ve been in Asia a long time so I know how slowly things move sometimes… especially Asian bureaucracies.

But this potential relaxation on foreign ownership limits is important.

Currently, listed equities have a foreign ownership limit of 49% (30% for banks).

Most larger (or more promising!) stocks in Vietnam are already at the foreign limit. This makes it difficult for foreign investors to put new money to work.

A lifting of the foreign ownership limit (estimated to be 60%-65%) should boost the market.

It should increase transparency and liquidity as well.

I think Vietnam remains a fantastic opportunity for investors. Everything is moving in the right direction. The macro outlook is excellent… and more importantly, it’s CHEAP!

Look at the chart below showing 2015 price-earnings multiples across Asia… There is value to be had here friends!

Asian 2015 Forward Price-Earnings Ratios. Includes China, Philippines, Japan, Malaysia, Australia, India, Jakarta, THailand, Singapore, Taiwan, Hong Kong, Vietnam and South Korea.

Overall, a very positive trip.

And yet another reminder that investors looking for growth MUST include Asia in their thinking.

Good investing,

Peter

P.S. At the end of this month I’m excited to be bringing you the ‘Global Real Estate’ edition of The Churchouse Letter… so keep an eye out!

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Peter Churchouse Peter Churchouse is a widely respected analyst and commentator on financial markets with well over 3 decades living in Asia. He spent over 15 years as Asia Strategist and Head of Research for Morgan Stanley as well as running a hedge fund.
 
He shares his knowledge, insight and investment recommendations through his subscription publication The Churchouse Letter, along with his free newsletter Peter’s Perspective.

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