Monday, November 17, 2008

Vietnam: Opportunities emerge amid chaos

09:50' 15/11/2008 (GMT+7)

Any time a stock market falls over 60 per cent within one year, you must ask if an opportunity is emerging or whether the coffin is truly being lowered into the ground. 

As one door closes, another one rich in opportunity opens

Investors in Vietnam and around the world are facing huge material declines in the value of their portfolios. Nathan Rothschild, one of history’s most famous financiers, said you invest when there was blood in the street. The lesson is simple, when the market mood is exuberant, people will buy at irrationally high prices. 

You can’t profit in such times. Rather it is when people are panic selling, at depressed prices, that you can buy into investments that will result in truly impressive profits. 

I believe Vietnam today offers many investment opportunities. There are strong economic challenges facing Vietnam as a result of the global financial crisis, but the country is nonetheless well placed to face these challenges and overcome the ‘growing pains’ that have stressed the economy thus far in 2008. The prices in the market today indicate that many companies are suffering. But those with strong management teams will find a way to survive and build value in the future.

A well-timed event

This message, of Vietnam’s resilience, is what VinaCapital will deliver to foreign investors at our 2008 Investor Conference, to be held 10-11 November in Ho Chi Minh City. The conference will gather investors and industry experts from Vietnam’s top companies, to discuss market conditions and trends. This year, we will not have the luxury of telling investors that huge returns are just around the corner. It will take time for the market to rebound. 

But long-term investors who missed entering the Vietnam market in 2005-2006 have a chance to correct that mistake. The foreign companies that so far in 2008 have contributed to record FDI commitments of over $57 billion, right in the midst of the stock market decline, certainly feel the country’s prospects remain strong. 

VinaCapital now manages five funds, three of which are listed on the Alternative Investment Market of the London Stock Exchange. Investors in our funds come from all over the world and include both individuals and institutions.
This year’s conference will draw about 100 participants, only a few less than last year. We expect there will be a very high level of interest among the participants at our conference, as they face tough decisions in the coming time.

They will want answers to three main questions. How have the VinaCapital funds performed this year? How will the funds cope with the current environment? And most importantly, is Vietnam still where they want to invest their money, and if yes, in what sectors?

While these questions do not have simple answers, we can say that despite the difficulties VinaCapital remains very happy to be focused on investing in Vietnam. 

Fund performance tested in 2008

VinaCapital’s three largest funds are closed-end funds that trade on the stock exchange. As such, even if their investments are sound, they are subject to market sentiment that can see their share prices rise and fall regardless of our assets here in Vietnam. And this is what has happened in September and October of 2008, market sentiment fell sharply and our funds saw their traded values plummet.

But what about our actual investments? Thankfully, we can report to our investors that our funds have very strong portfolios, including investments in companies and projects that have remained profitable throughout this difficult year. Only Vietnam Opportunity Fund, which invests in equities, has seen its asset value drop noticeable in 2008, as a result of the poor stock market performance.

In terms of how our funds will cope with the current environment, there are many strategies that we will discuss with our investors. Most importantly, none of our funds have any debt at fund level. This is a crucial point, because the sharp decline in closed-end funds around the world is due to the perception that they are heavily leveraged. That is not true in our case. 

In general, we feel our funds are well-placed despite the dire market conditions. VinaLand Ltd, for example, is invested in a large number of real estate projects that gives us flexibility in prioritising those that are best-placed to profit from the ongoing demand for retail, hotel and residential space. Vietnam Opportunity Fund has several options to free up capital to invest in Vietnam’s top blue chips, now trading at low prices. 

VOF is also looking at government bonds, which have emerged as an excellent value in the latter half of 2008. Perhaps best-placed of all is Vietnam Infrastructure Ltd, which has a strong pipeline of projects and over $100 million in cash available for investment. The question then becomes whether Vietnam remains a good place to invest. Will the country recover faster than other markets around the world, or will the current growing pains see Vietnam lag behind the markets in other nations?

We believe that Vietnam’s lack of integration with the global financial world and almost no exposure to subprime investments should keep Vietnam on the sidelines of the ongoing world financial storm. In addition, consumer demand should remain strong for the foreseeable future, which will help domestic businesses remain solvent. 

Furthermore, many of Vietnam’s exports are agricultural products that should not see significant demand declines, although commodity prices are currently falling. As Vietnam’s first oil refinery comes online next year, the country also stands to move up the value chain in the profitable oil sector. However, if the crisis worsens or is prolonged we can expect to see an impact on Vietnam. 

Exports will be affected, and there may be a slower disbursement of FDI commitments and a repatriation of indirect investments through the sale of equities and bonds. VinaCapital and other investment funds will find it difficult to raise more money to invest here, given the restrictive credit environment around the world.

Focus on domestic growth

For the investments we will make soon, our choices will be critical in terms of protecting shareholder value in the short term and building wealth in the long run. VinaCapital will continue to stay away from export-oriented investments. We have not really focused on this sector in the past, and will continue to look first to companies that promote and benefit from domestic economic growth. 

Domestically produced consumer goods, financial services, healthcare, education, tourism and technology are all sectors we remain bullish on. Property and infrastructure are also focus sectors, but in this case the quality of projects in terms of fundamentals like location is the determining factor in their potential for success. We will strive to find companies with strong balance sheets and good earnings prospects. The skill and dedication of management teams is also very important, particularly in difficult times.

With the VN Index now at a very low 370-380, valuations of Vietnamese companies are very attractive, with price-to-earnings ratios of about 10x, comparing favourably to regional markets with PEs ranging from 12-15x such as Hong Kong, China, Japan, Malaysia and Indonesia. The third quarter saw improved economic figures in terms of inflation and the trade deficit. Company earnings this year are sharply lower, however, and it will probably take several quarters of solid economic figures before positive sentiment returns to the market. The potential for growth is there, but it will likely be well into 2009 before the market makes a strong rebound.

In chaos, opportunity emerges

Earlier I invoked Rothschild’s quote about ‘blood in the street’. To be clear, no one wants to see chaos in world financial markets, and we should remember that real human beings have suffered because of the mortgage crisis in America and the spread of the credit crisis around the world. But in troubled times there is always opportunity, and investors should always view their role as searching out the best way to grow their money and, by extension, grow national economies.

Vietnam remains this region’s most dynamic emerging economy – based on a young, increasingly well-educated population; a stable political regime and rich natural resources tied to a long coastline in the heart of Asia. The world’s hottest economic sectors – oil, agribusiness, tourism – are all among Vietnam’s leading earners. Look for the market to stabilise in the coming months, and then look closely at the opportunities that emerge.

(*) Horst Geicke is chairman of VinaCapital Group, established in 2003 and now Vietnam’s leading investment management and financial services group, with over $1.8 billion in assets under management. He has been an active investor in Vietnam for over 15 years. Geicke is also the chairman of Hong Kong’s Pacific Alliance Group.

By Horst Geicke (*)