Vietnamese stocks may rally as inflation eases, Dragon says

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Vietnamese stocks, the second-best performers in Asia this year, are cheap and may rally in the next two quarters as slowing inflation prompts the central bank to cut interest rates, Dragon Capital Group Ltd. said.

The market's "fair-value multiple" is between 10 times to 12 times estimated profit, Dominic Scriven, chief executive of the Ho Chi Minh City-based fund manager, which oversees about $1 billion in assets, said by phone on Feb. 17. His Vietnam Growth Fund, incorporated in the Cayman Islands, has returned 14.4 percent this year, the second-best performance of 18 similar funds tracked by Bloomberg.

The benchmark VN Index jumped 2.7 percent on Monday, taking its 2012 gain to 18 percent, as inflation slowed and the central bank signaled it may cut borrowing costs. The measure's 27 percent slump last year helped drag valuations to 6.9 times estimated profit on Jan. 10, the lowest level for data compiled by Bloomberg dating back to November 2008. It now trades at a multiple of 8.65.

"It's very clear to us that after a number of volatile years, the monetary and economic policy-making is back on track and is having results," Scriven said. "The equity markets are very inexpensive and trade at a relatively low valuation. One would expect multiples to return to a mean."

The VN Index, which tracks 302 companies traded on the Ho Chi Minh City Stock Exchange, posted the biggest loss among Asian benchmark gauges in 2011 as the government took steps to curb the highest inflation rate in the region.

Slowing inflation

Vietnam's inflation cooled for a fifth month in January, with consumer prices rising 17.27 percent from a year earlier, the slowest pace in 10 months. The rate, which was 18.13 percent in December, may slow to a single-digit pace as soon as June, Louis Taylor, Standard Chartered Plc's chief executive for the country, said on Jan. 13.

"We expect a bigger and more sustainable stock rally in the second and third quarter when inflation is expected to reach single digits," Dragon Capital's Scriven said. "We're looking at a year-end inflation number of 8 percent to 9 percent with interest rates likely to fall as a consequence."

Asia's central banks from Indonesia to Thailand started cutting interest rates last year to shield growth as Europe's debt crisis threatened to push the global economy into a recession. Vietnam's central bank lowered its repurchase rate on July 4 to 14 percent from 15 percent. It raised the refinancing rate to 15 percent by the end of 2011 from 9 percent at the end of 2010.

Lower costs

Speculation that inflation will ease helped drive the VN Index up the most in Asia Monday. The gauge has climbed this year by the most of any benchmark gauge in the region after the BSE India Sensitive Index.

"When interest rates decline, businesses will enjoy lower borrowing costs," Pham Thanh Thai Linh, Hanoi-based head of research at Bao Viet Securities Co., a unit of Vietnam's biggest insurer, said by phone Monday. "Falling interest rates will also boost the attraction of stocks, compared with other investment channels like savings."

The Southeast Asian nation's government will continue to implement its Resolution 11 strategy, Prime Minister Nguyen Tan Dung in December told the Consultative Group on Vietnam, which has convened annually since 1993 to help the nation's transition to a market-based economy. Resolution 11, approved in February, aimed to tighten fiscal and monetary policies.

Manufacturing hub

The nation will aim for gross domestic product growth of 6 percent in 2012, Dung said. Vietnam's economy, a manufacturing hub for companies including Intel Corp., expanded 5.89 percent last year, down from 6.78 percent in 2010.

Consumer-price growth in 2012 may be less than 12 percent at worst and 8.5 percent to 9 percent in a "good" scenario, State Bank of Vietnam Governor Nguyen Van Binh said at a press conference on Jan. 11 and signaled that the central bank may cut rates to "more suitable" levels after the first quarter.

"With easing inflation, we believe the SBV is likely to lower rates towards the end of the first quarter of 2012," Trinh D Nguyen, a Hong Kong-based economist at HSBC Holdings Plc, wrote in a note dated Feb. 15.

Vietnam's five-year government bonds gained for a seventh week on speculation interest rates will be cut. Yields on five- year notes fell 14 basis points, or 0.14 percentage point, last week to 12.23 percent, according to a fixing from banks compiled by Bloomberg.

"˜Hard line'

"Consensus is growing that inflation is coming down and this will give the otherwise hard-line State Bank of Vietnam a chance to ease monetary conditions," Scriven said. "The bond market is telling you that forward inflation is somewhere between 5 percent and 10 percent."

Dragon Capital is positive on companies that are likely to benefit from a drop in interest rates, the fund manager said, declining to name any stocks. The Vietnam Growth Fund had 71 percent of its assets in listed equities, according to a January factsheet available on the money manager's website. Of this, 34 percent was in shares of diversified financial companies, the highest for any single industry, and seven percent was in real estate, the data showed.

"We are optimistic that there will be sufficient basis for some easing of the extremely tight policies and that is obviously likely to benefit broad areas of the economy and also the asset market," Scriven said. "One would expect some greater response from stocks in the interest-rate sensitive sectors like real estate and financials."

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