Churchouse Letter
May 2014                   by Peter Churchouse

Vietnam: Standing Out From the Crowd

For Baby Boomers such as myself, mention of the world “Vietnam” conjures up memories of the students shot by the U.S. National Guard at Kent State University, hippies demonstrating against the war – and young men being sent home in body bags.

The Vietnam War helped shape the attitudes and beliefs of a generation of young Westerners from New York to New Zealand, from San Francisco to Sydney. Worries over “Cold War creep” as communism threatened to spread throughout Southeast Asia gave way to increasing anger about how our governments were lying to us. There’s a good case to be made that the war was the start of the loss of faith in our leaders and modern politics that so many people now feel to this day.

How ‘Nam has changed. Almost immediately after the end of the conflict in 1975, the process of creating a united nation with a shared past and an optimism for the future began.

This is Vietnam’s moment. I’ve been keeping an eye on the country for some time. My wary outsider’s view was recently improved when an old investment ally invited me to come and see how things are coming first-hand at a “Vietnam Access Day” conference in Saigon.

It’s easy to compare Vietnam with its burly neighbour, China, and the two countries do share many similar features. Both are communist countries that have now moved well down the path towards capitalism. But that is too simple a way of viewing this complicated part of the world.

Vietnam has been touted as the “poster child” of the international investment community before – prior to disappointing investors and losing its appeal as fast as it gained it. So a healthy level of skepticism is the right attitude towards claims that it’s all different this time around.

Things can get pretty crazy with Vietnam’s economy. Twice in this decade it has seen inflation leap to over 20 percent. Money flowed in fast and flowed back out even faster.

But we believe that significant change is happening in Vietnam. These shifts will push the country to create a more market-driven economy that will attract greater amounts of investment from the outside world.

There’s a lot of concern over emerging markets these days. Countries like Indonesia and India, and their currencies, got hammered when the Fed started to “taper” its massive money printing and asset-purchase plan.

I would like to walk you through just why Vietnam is at a very different stage in the cycle from its neighbours, and its emerging-market peers. As I've said before, not all “EMs” are Turkeys, as I’ll demonstrate.

Vietnam is not an easy market to invest in. There should just be a simple ETF right? Wrong. And we’ll explain why.

Enjoy the issue,

Peter


Why a Nation Once So Scarred by War is the Darling of the Emerging Market World…

In 1997, I made my first sortie to Vietnam. The motive was a 700-mile yacht race from Hong Kong to Nha Trang, a town several hundred miles up the coast from Ho Chi Minh – the city many still call Saigon. This was the first time that any sailing event had ever taken place in Vietnam. The event was a logistical nightmare that involved dealings, discussions and negotiations with something like 16 government departments, all wanting their say, a piece of the pie... a slice of the action.

When we got there, we suffered through a laborious process dealing with five of those government departments. After that joyful experience, we retreated to our hotel for some delicious Vietnamese food and a few well-earned drinks. It turns out sailors are the same the world over.

I use the word “hotel” carefully. The building resembled a prison block from a Siberian gulag. That’s not surprising – it was designed and built by Russians. Still, the Vietnamese beers were excellent and we were surprised at the good supply of very quaffable and very reasonably priced Bordeaux wines. The food was delicious and was vacuumed up in some quantity.

After a couple of hours, the time came to pay the bill and head to our rooms for a welcome shower and a nap. My great friend Vic called for the bill, and when he got it, instantly held it as far away as possible, in shock when he saw that it amounted to several million “whatever’s.”

The calculators were whipped out (remember, this was in the pre-iPhone world!) and what looked like a staggering amount of Vietnamese Dong turned out to be the princely sum of about US$220 – a very reasonable amount given the amount of food and drinks that this hungry, thirsty bunch had consumed. Vic volunteered to pay so he could keep the check as a souvenir, a bill that had more zeros on it than anything he had ever seen in his life.

Bills in dong still look like telephone numbers, and paying a small tab still involves large piles of notes. Counting the notes to pay for a dinner can take long enough to justify ordering another beer to drink while you’re at it.

Since that time, the currency has come under occasional bouts of pressure as macroeconomic conditions worsened. Inflation soared to 28 percent in 2008, and hit 22 percent as recently as 2011. The current-account deficit blew out, and interest rates rose sharply. Today a U.S. dollar will buy you about 83 percent more dong than it did back at the time of our first sailing foray to Vietnam. But as the government put wiser economic policies into play over the past three years, the value of the dong has pretty much flat-lined against the U.S. dollar. Inflation has been reined in, standing at a manageable 4.4 percent at last count, and interest rates have shrunk dramatically. The yield curve (the difference between interest rates on bonds with lifespans from one year to 10 years) now looks like a “normal” curve.

That’s all good news for business and investment. A nation that I once considered exotic and tough to navigate, business-wise, is now a worthwhile destination for investors to chart a course to. It’s a vibrant country with a young work force, new laws that increasingly encourage investment from overseas, and many of the same features that have made China such a popular investment destination.

Many Americans of my generation, the Baby Boomers, have less than fond memories of Vietnam. After all, it claimed the lives of an estimated 2.3 million people on both sides of a conflict that spanned more than a decade (some would argue more like two decades). The “American War,” as it’s known in Hanoi, helped shape the attitudes and beliefs of a generation of young Westerners from New York to New Zealand, from San Francisco to Sydney. It was a flash point of the hippie movement’s early days, causing strong anti-war feeling among college students and other young people.

The Vietnam War dragged on from the popular leadership of the five-star general Dwight D. Eisenhower – who didn’t want to fight a land war in Asia – and the “golden boy,” John F. Kennedy, through to the dirty incursions and bombings in Laos and Cambodia under a man who inherited the presidency, Lyndon Johnson, and then the increasingly controversial Richard Nixon. The publication in 1971 of the Pentagon Papers, top-secret documents showing the history of secret U.S. involvement in Vietnam and how the government had deceived the public about it, carried as much weight then as the Edward Snowden episode does now. You could say this was the time when the United States fell out of love with its army, its commander-in-chief – and fell out of love with itself.

Vietnam has emerged from its traumas as a surprisingly strong and united country. Yes, there are still cultural and attitude differences between north and south – Americans in particular are much loved in Saigon but Hanoi residents are sometimes seen as stand-offish towards outsiders – but the nation’s people seem to have accepted the need for unity. The thought of going through all that horror again helps shape attitudes and some spirit of compromise.

Following the departure of US troops in 1973 and the end of the war when Saigon fell in 1975, the political reunification of North and South Vietnam happened soon after. For the next 15 years, a united Vietnam laboured under the burden of collectivist communist rule and continued conflict with her neighbours. Growth stagnated. Progress was non-existent. In a period that saw the emergence of Asia’s “tiger economies”, Vietnam was being left behind.

"A Market Economy with Socialist Characteristics

In 1986 Vietnam launched a policy of economic re-forms known as ‘Do Moi’. The plan laid out a blue-print that would transform Vietnam from a centralized economy into a ‘socialist-orientated market economy’, much like China did in the early 1980s. Under Do Moi, collectivist farms were abolished and price controls on agricultural products lifted. The state now encouraged private businesses and foreign investment, including foreign-owned enterprises. Like China, reform in Vietnam had started on the farms, and was followed by the development of higher-value added non-agricultural jobs. And it did this quite successfully.

By the 1990s, Vietnam had become a bit of a “blue-eyed boy” for the international investment community. It seemed destined to follow the course sailed so successfully by its northern communist neighbour. Investors latched on to the thought that Vietnam was going to be another China, just with a 10- or 15-year lag. If you missed out on the early boom in China, here was the chance to participate in a repeat performance of a near neighbour.

Money poured in. By July 2000, regulators had set up Vietnam’s first stock market – the Ho Chi Minh Ex-change. Foreign and local investment in everything from houses, offices, factories and hotels took off. I remember numerous Asian-based developers from Hong Kong, Singapore, Taiwan, and Korea beating a path to Ho Chi Minh City, Hanoi and the delightful beach settings of Vietnam’s coastline on the South Chi-na Sea. Hotels were a favourite investment, with others branching into residential and commercial development.

In China’s case, the initial reforms continued to pick up pace and branch into different sectors of the economy. That happened less in Vietnam. By the mid-2000s, the initial enthusiasm for change seemed to wane. Bad macroeconomic management and factional interests in the government caused business conditions to deteriorate, and fast. Like we’ve seen so often before in other troubled markets, Vietnam built up high trade and cur-rent-account deficits. Borrowing went through the roof. Government finances deteriorated, inflation accelerated, and the currency dived.

The Lights Almost Went Out

Vietnam’s economy was in a tailspin well before Lehman Brothers blew up the global financial markets. This has meant the climb back out of the hole has been all the more painful and difficult. Other emerging markets recovered from a short sharp downturn very quickly after the financial crisis – but now risk another downturn. Vietnam’s recovery from a much deeper hole took longer, but the country now looks much healthier.

It is a Country We Argue is Now Ripe for a Small Amount of our Equity Risk Capital.

As we have noted before, not all emerging markets are Turkeys. Or Brazils. Or Argentinas. Vietnam is one emerging market that is in a very different part of the cycle from most of its cousins. It is a couple of years behind the rest of the pack, and it is now definitely in a very different part of the economic cycle...



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