Vietnam stocks seen extending region's best gain

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Workers walk past the Ho Chi Minh Stock Exchange building in Ho Chi Minh City.

Vietnam’s stock index, Asia’s best performer this year, is poised to extend gains as economic growth quickens and the government relaxes foreign ownership limits, according to a Bloomberg poll.

The benchmark VN Index (VNINDEX) will advance about 8 percent from its closing level on Jan. 24 to 603 by year-end, according to the average of 10 analyst estimates in a Bloomberg survey. The gauge has increased 11 percent this year, trailing only Dubai among measures in the world’s 50 biggest markets. The MSCI Asia Pacific Index has declined 2.8 percent.

Vietnam’s government says the economy will expand at the fastest pace since 2011 this year as exports jump and the state buys bad loans from banks. Foreign investors poured a net $263 million into the nation’s stocks last year amid growing appetite for the least-developed markets, and analysts predict Prime Minister Nguyen Tan Dung will give overseas money managers more room to boost holdings in 2014.

“We are very positive for this year as the macro environment looks very stable, with a lot of potential upside,” Tran Thi Kim Cuong, the Ho Chi Minh City-based head of equities at Manulife (Vietnam) Asset Management, which oversees about $390 million, said in a phone interview Jan. 24. She predicts the VN Index will reach about 605 by December.

The benchmark gauge for Vietnam’s $50 billion stock market rose 1.2 percent to 560.19 on Jan. 24, the highest level since November 2009. It fell 0.7 percent to 556.52 at close today.

Low valuations

The country’s shares are inexpensive relative to regional peers even after this year’s rally. The VN index is valued at about 12 times estimated earnings, the lowest level in Southeast Asia. Profits at VN index companies are projected to rise 20 percent in 12 months, compared with a 17 percent increase in the MSCI Frontier Markets Index, according to analyst estimates compiled by Bloomberg.

Vietnam’s economy is showing signs of improved health. The government projects gross domestic product will climb 5.8 percent this year, compared with 5.42 percent last year and 5.25 percent in 2012.

Exports jumped 15 percent in 2013 and disbursed foreign direct investment grew 10 percent to $11.5 billion, according to the General Statistics Office. The central bank has cut its benchmark refinancing rate eight times since the beginning of 2012. Inflation has slowed to a 5.45 percent pace as of January from 23 percent in August 2011.

Positive outlook

“Macroeconomic stability, coupled with growing companies and decent valuations, makes Vietnam attractive,” said Michel Tosto, the head of institutional sales at Viet Capital Securities, the country’s third-largest brokerage. “We are bullish,” he said, forecasting the VN index will reach 620 by the end of the year.

Low trading volumes have discouraged some investors from buying Vietnam stocks. The daily average value of shares changing hands on the Ho Chi Minh exchange in the year through Jan. 24 was about 1.09 trillion dong ($52 million), data compiled by Bloomberg show. That compares with about $15 billion on China’s Shanghai Stock Exchange.

“It’s a very small stock market with not many companies listed,” said Christopher Wong, a senior investment manager at Aberdeen Asset Management Asia Ltd. in Singapore.

While Vietnam’s economic recovery spurred Fitch Ratings to raise its outlook to positive from stable on Jan. 23, the ratings company said the country’s banking system remains a source of weakness.

Bad loans

Non-performing debt reported by commercial lenders amounted to 3.79 percent of total loans at the end of December, Le Duc Tho, chief administrator at the State Bank of Vietnam, said on Jan. 21. That compares with a central bank estimate of 7.8 percent at the end of last year. The bad-debt ratio may actually be between 10 percent and 20 percent, according to JPMorgan Chase & Co., which cited estimates by market participants and credit rating companies.

Policy makers set up an asset-management company to purchase soured loans from banks in July. VAMC, as the entity is known, bought 39 trillion dong of debt from 35 banks through December, and may extend purchases to as much as 150 trillion dong by the end of 2014, State Bank of Vietnam Governor Nguyen Van Binh said last month. Removing troubled loans will be the central bank’s priority this year, he said.

Foreign ownership

“The banking system clean-up will be a major catalyst for the market in 2014,” Michael Kokalari, an analyst at CIMB Securities International Ltd., wrote in a report this month.

The VN index will surge if the government announces a relaxation of foreign ownership limits, according to Kevin Snowball, the chief executive officer of PXP Vietnam Asset Management in Ho Chi Minh City.

Policy makers issued a decree on Jan. 6 allowing “strategic” foreign investors to take a 20 percent stake in banks, up from the previous ceiling of 15 percent. The move has prompted speculation of a broader easing of overseas investment rules.

The Ministry of Finance has submitted a plan to Prime Minister Dung that would lift the limit on foreigners’ holdings of voting shares in some industries to 60 percent from 49 percent, Nguyen Son, head of market development at the State Securities Commission, said on Nov. 14.

Foreign holdings of about 20 companies, including Vietnam Dairy Products JSC and DHG Pharmaceutical JSC, are at the 49 percent limit, according to Ho Chi Minh City-based ACB Securities Co.

Trading accounts

Shares of Vinamilk, as the nation’s biggest dairy company is known, have surged 43 percent in the past year while DHG Pharmaceutical, the largest listed drugmaker, has jumped 65 percent. That compares with the VN index’s 24 percent gain.

The number of new trading accounts opened by foreign investors increased 56 percent last year to 730, according to data from Vietnam Securities Depository, which offers trading support services. International investors bought a net $75 million of Vietnam stocks this year, according to data compiled by Bloomberg.

“The market will benefit from continued cash inflows and expectations of a recovery in growth in the coming years,” said Attila Vajda, the head of institutional sales at the ACB Securities. He predicts the VN index will climb to as high as 620 by year-end.

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