While emerging market equities have struggled to hold onto gains this year, Vietnamese stocks have surged 20 percent to become Asia’s best performing market, driven by improving macro-economic fundamentals and stabilization in the local currency.
Further upside is expected for the market, strategists say, with some predicting gains of up to a third for the benchmark VN Index this year, boosted by optimism over company earnings and increasing participation by domestic and foreign investors.
“Recent AGM (annual general meeting) information flow has made us take a serious reassessment of earnings growth rates (for local companies) that could easily exceed our current 2-3 year projections by 30 percent. The picture is only getting stronger in our view,” David Roes, CEO of Asean Investment Management told CNBC.
“With the lending rates dropping more than 1000 basis points from their peak 2011 levels, this will add 65 percent to market earnings over the next three years,” he said.
Roes, who has expects the market to gain 25 percent in the next six months, expects Vietnam’s equity market to outperform ASEAN markets over the next three years. In comparison, Thai and Indonesian stocks have gained 12 and 1.4 percent respectively since the start of 2012. The MSCI Emerging Markets Index, meanwhile, declined 1.2 percent year-to-date.
Domestic investors, which account for 90 percent of total turnover, are increasingly turning to the stock market for more attractive returns, given falling bank deposit rates and higher property prices, says Kevin Snowball, CEO of PXP Vietnam Asset Management - the second-oldest asset management company in the country.
“We have started to see money come into the market from investors’ savings in physical gold, (as) gold is no longer a momentum trade,” Snowball added. Gold has traditionally been the preferred asset to hold in Vietnam, both as a hedge against the nation’s high inflation and as an attractive alternative versus the local currency – the dong – which has been devalued multiple times in recent years.
Snowball, who runs a closed-end Vietnam fund listed on the London Stock Exchange, is the most bullish on Vietnamese stocks, expecting the VN Index to rise over 35 percent over the next six months. “Once we break through 500 – I would expect the Index to get above 600 this year.”
Roes says he too has seen a “significant shift” in the mood of local investors over the last six months, and expects the recent performance of Vietnamese stocks to attract interest among foreign investors.
With the market trading at 9 times 2012 earnings, compared to a historical trading range of 8-35 times earnings, market watchers including emerging markets guru Mark Mobius of Templeton Emerging Markets Group say valuations look compelling.
“Valuations are cheap at the moment and we think they will continue to be cheap. That's the reason why we will continue to favor Vietnam stocks in our Templeton Frontier Markets Fund," Mobius said.
"The Vietnam stock market is so illiquid at the moment, so any amount of money flows would make a big difference,” he added.
Albeit low, liquidity in the market has risen steadily over the last six months, from a turnover of $12 million in January to around $40-50 million in June, according to PXP Vietnam Asset Management.