Vietnam stock inflows at 5-year high on growth

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A man rides a motorcycle past the Ho Chi Minh City Stock Exchange in Ho Chi Minh City. Photo: Bloomberg

International investors are buying the most Vietnamese stocks in five years, lured by Southeast Asia's cheapest valuations and government efforts to bolster economic growth.

Overseas funds bought a net $253 million of Vietnamese stocks this year to May 29, the biggest year-to-date purchases since 2008, speculating corporate profits will grow for the first time since 2010 as inflation (VNCPIYOY) eases and borrowing costs decline, data compiled by Bloomberg show. More foreigners opened Vietnamese equity trading accounts in the first four months of this year than the whole of 2012, data from the Vietnam Securities Depository show.

Vietnam's VN Index (VNINDEX) has gained 25 percent this year, making it Southeast Asia's best performing benchmark gauge, as the central bank cut interest rates this month for an eighth time since the start of 2012 and the government approved the formation of a debt asset management company to soak up banks' bad loans that were hampering growth. Even after the rally, the MSCI Vietnam Index trades for 13.2 times projected 12-month earnings, 18 percent lower than the average ratio for the region's five biggest markets.

"We like Vietnam as it has some core secular drivers supporting both the economy and the equity market in the long run," Samir Shah, an investment manager at Advance Emerging Capital Ltd. in London, wrote in an e-mail on May 28. "Setting up a "˜bad bank' will loosen the credit cycle and stimulate growth. Vietnam has already seen a cut in rates and we should expect more."

The central bank has reduced policy interest rates by 800 basis points since March 2012.

The VN Index rose 0.2 percent to 516.27 at the 11:30 a.m. local-time break, after earlier gaining as much as 0.7 percent to the highest level in more than two years.

Earnings growth

As of April 30, 16,238 foreign investors were granted Vietnam stock trading accounts, compared with 16,001 in the whole of 2012, according to data from the Vietnam Securities Depository, which offers trading support services.

Earnings of companies in the MSCI Vietnam Index will rise 16 percent this year, the first increase since 2010, according to data compiled by Bloomberg.

"Foreign investors' interest toward Vietnam is the strongest since I've been here," Michael Kokalari, Ho Chi Minh City-based head of research at Maybank Kim Eng Securities Inc., Vietnam's sixth-largest brokerage, said in a phone interview on May 29. "We are overwhelmed with visitors and calls."

Growth forecasts

The VN Index will climb to 550 by the end of this year, a 6.8 percent advance from yesterday's close, and is poised for "a bigger year next year," Kokalari said. The gauge fell 0.2 percent yesterday to 515.09, paring its gain in May to 8.6 percent. The index is less than half its March 2007 peak of 1,170.67.

The reluctance of banks to lend may result in economic growth of less than 6 percent for a third straight year, based on forecasts from the International Monetary Fund and the World Bank. While the government estimates economic growth will quicken to 5.5 percent from 5 percent in 2012, that's still lower than average of 7.1 percent a year since 1990, data compiled by Bloomberg show.

Concerns among some investors about corporate governance in Vietnam remain. Last year, eight former executives of Vietnam Shipbuilding Industry Corp. and its units were sent to prison for economic mismanagement, two senior banking officials were arrested and the former chairman of Vietnam National Shipping Lines was investigated for falsifying contracts, part of moves to hold executives accountable for mismanagement at state-owned companies.

Bad loans

"People are looking at Vietnam as it's been a disastrous market," Hugh Young, a managing director at Aberdeen Asset Management Asia Ltd. in Singapore, said in a phone interview on May 28. "Everyone wants to put money there and people will put money there; whether they know what they're doing or not is another matter. Vietnamese companies need to convince people that they can treat shareholders properly and fairly, and that the law works."

Non-performing loans reported by commercial lenders stood at 4.51 percent at the end of March, Deputy Prime Minister Nguyen Xuan Phuc told the National Assembly on May 20. That compared with a central bank estimate of 7.8 percent at the end of last year. Market participants and credit rating companies estimate bad debt may be between 10 percent and 20 percent, according to JPMorgan Chase & Co.

Prime Minister Nguyen Tan Dung approved on May 22 the formation of the asset management company to address bad loans in the banking system and boost sluggish credit growth.

Improving health

Moves to clean up banks will reduce bad-debt ratios to less than 5 percent of total loans at the end of this year, central bank Deputy Governor Nguyen Dong Tien said on May 21. Prime Minister Dung may also approve next month a central bank proposal to raise the caps for foreign investment in local lenders as an additional measure to help weak financial institutions, Tien said.

"If the debt-asset management company works properly and the government can point things in the right direction as they have been doing, we will see another rally in the market," Marc Djandji, a partner at the Asean Strategy Group in Ho Chi Minh City, said in a May 20 interview.

Vietnam's economy is showing signs of improving health. Inflation slowed to 6.36 percent in May, the least since August 2012, and exports climbed 15 percent in the first five months from last year. The central bank announced this month a $1.4 billion support package to assist home buyers and developers with subsidized loans for affordable housing. That will help clear an estimated $2 billion overhang of finished and unsold properties, according to Kokalari.

The government also plans to start a pilot program to raise the 49 percent foreign ownership limit for some companies, the State Securities Commission said in January.

"There are no indications why foreign funds would stop buying, as valuations are still attractive," Andy Ho, who helps oversee about $1.5 billion in assets at VinaCapital Investment Management Ltd., the country's largest fund manager, said in phone interview from Ho Chi Minh City on May 27. "The macro economy is stabilizing and will turn very positive in six to 12 months."

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