With 2011 just around the corner, this year is shaping up to be a relatively strong one for global equity markets. While the U.S. and much of Europe have turned in modest gains so far, it is the developing world that has been the primary driver of a continued economic recovery. And the year’s best performers haven’t been the rock star economies of the BRIC; many smaller, lesser-known emerging markets have delivered eye-popping performances, much to the delight of investors with broad-based exposure. These surging countries are found in all corners of the globe, stretching from South America to Southeast Asia.
Many of the year’s best performers are flying under the radar, but just a few years ago would have been virtually out-of-reach for many investors. However, as the proliferation of ETFs has continued over the past several years, a number of country-specific ETFs have debuted that allow investors easy, efficient exposure to previously head-to-access international markets. The development of the ETF industry has made it easy to buy diversified exposure to exotic economies in a single ticker. One such market that is now easily accessible in ETF form is Vietnam, a rapidly developing nation in Southeast Asia that is now thriving thanks to a wealth of basic materials and its manufacturing prowess [see Looking For Green Shoots? Try Southeast Asia ETFs].
Although the nation has had more than its fair share of economic challenges in the past, Vietnam has now embraced free market principles and has seen its economy expand at a rate of close to 7% for the last several years. After stumbling during the recent global downturn thanks in part to sovereign debt concerns, the Vietnamese economy is once again red-hot. After being rangebound for much of the year, Vietnam began to take off at the end of November, and has now surged by over 20% in a matter of weeks. And while the recent gains are turning heads, it remains to be seen if the momentum will carry over into 2011. Below, we profile the main reason for this surge and discuss why investors need to remain cautious when considering this often volatile emerging market.
Vietnam Surges Higher
The recent surge has been driven by a number of factors, perhaps the biggest of which was a positive regulatory development. The nation’s commercial banks recently agreed to limit deposit rates at a max of 14%, potentially boosting business throughout the nation. The commitment among banks “can be considered good news for the stock market,” said Giang Trung Kien, head of research at FPT Securities Joint-Stock Co. “Sentiment among investors is very good and money keeps pouring into the market.” Because lower deposit rates typically lead banks to reduce interest charges on loans, this change was a welcome one for many Vietnamese businesses. This news after the country’s central bank grew increasingly concerned over the high deposit rates offered by banks, some of which were as high as 18%.
Higher rates pushed many investors to low-risk bank accounts and out of bonds and stocks, starving small businesses from much-needed capital. “The cap of 14 percent is reasonable, considering inflation this year is forecast at about 11 percent, then adding about 2.5 percent to 3 percent, which is internationally accepted,” said Le Dang Doanh, former senior economist at the Ministry of Planning and Investment. With this potentially massive boost in investment and a lack of action by the central bank to raise rates, investors were suddenly incentivized to allocate their holdings to more risky assets, news that powered an incredible—albeit brief–bull run for the nation. [see ETFs For The 'Next 11' Economies].
Despite this potentially large boost to the Vietnamese economy, concerns remain for this still extremely poor country. Despite being a major exporter of manufactured goods and primary products such as oil, Vietnam has a large trade deficit. That has not helped the country’s long history of confidence issues with the national currency, the dong, or with inflation fears; the rate of price increases was 11% in November. These issues, combined with ongoing political and financial turmoil, caused both Fitch and Moody’s to downgrade the country’s sovereign debt recently, with Moody’s pushing the rate down to B1, or ‘speculative and subject to high credit risk.’ These downgrades, as well as ongoing political tensions, could help to squash the budding market recovery in the country and push the nation’s growth rate lower. Some analysts believe Vietnam is at a crossroads, and that failure to take necessary actions could have an adverse impact on the economy. “An unwillingness to tighten effectively monetary policy and to allow the exchange rate to depreciate in line with market pressures [has] weakened the balance of payments and [has] elevated the risk of an external payments crisis,” said Tom Byrne from Moody’s sovereign risk group [read Seven Most Corrupt Country ETFs].
How To Play
The best, and up to this point the only, way to play Vietnam via an ETF is with the Market Vectors Vietnam ETF (VNM). The fund tracks the Market Vectors Vietnam Index, which offers exposure to publicly traded companies that, predominantly, are domiciled and primarily listed in Vietnam and which generate at least 50% of their revenues from Vietnam. The fund currently has about $25 million in assets under management and an average daily volume of over 160,000 shares [see Emerging Market ETF Investing Beyond The BRIC].
VNM offers investors a heavy focus on companies in the financials (37%), energy (26%) and industrial (11%) sectors, with these three corners of the market making up about three quarters of the total. In terms of individual holdings, Baoviet Holdings, a Vietnamese insurance company, takes the top spot (11%) and is followed by construction firm Hoang Anh Gia Lai Group (7%) and Petrovietnam Fertilizer & Chemical (6%). Thanks to the inclusion of companies that generate at least 50% of their revenues from Vietnam without being listed there, VNM has a fair chunk of its holdings listed in the UK, Thailand, and Malaysia. VNM charges investors an expense ratio of 76 basis points and has gained roughly 11.7% over the past year, including an incredibly robust performance in December. If the bank’s new plan for capping interest rates successfully pushes money into riskier sectors of the economy, it could help the emerging nation to grow significantly in 2011 [use our free Country Exposure Tool to see which ETFs offer allocations to any country].
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