Can The Vietnam ETF (VNM) Bounce Back From Currency Devaluation?

by on February 16, 2011 | ETFs Mentioned:

Soaring food prices across much of the developing world has led to a difficult situation for many central bankers in emerging markets. They are torn between raising rates to curb inflation but also potentially choking off further growth in their economies. One nation facing this issue is Vietnam where the average lending rate is roughly 15.3% a year but inflation is also soaring by close to 20% a year as well. But with sky high rates already plaguing the economy, many felt that they had no choice but to institute another devaluation of the currency, the dong, this time by 8.5%. This most recent devaluation marks the third time in a year that the country has changed the value of the dong, throwing investors into a panic. Even more unnerving to investors is likely to be the escalation of the devaluation of the currency; in 2010 the dong was devalued by 3.2% and then 2.0% later in the year, paltry steps compared to the 8.5% cut investors just saw. “This is a bold and decisive step by the central bank,” said economist and former government advisor Le Dang Doanh. “But the devaluation should be just part of a package of measures that the government should take.” Economists hope that the move will help make Vietnamese exports cheaper and thus more enticing to foreign consumers, helping to boost growth in the struggling economy. More importantly, the move could also help to stop the Vietnamese central bank from hemorrhaging its supply of foreign reserves which have plummeted from more than $24 billion at the end of 2008 to just over $10 billion at the end of 2010 [see Emerging Market ETF Investing Beyond The BRIC].

This troubling situation has put a special focus on one of the few ways to gain access to the Vietnamese economy the Market Vectors Vietnam ETF (VNM). The fund constitutes the only ETF currently on the market that offers any exposure to the country by tracking the Market Vectors Vietnam Index. This benchmark provides 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 has been under significant pressure as of late thanks to this rapidly deteriorating economic situation with no end in sight. VNM has fallen by close to 9.5% during the first half of February and although it has managed to bounce back from this fall, questions still remain over the long term health of the economy and its ability to keep up growth given the high interest rates and soaring CPI [read ETFs For The Next 11 Economies]

Currently, the fund consists of 32 securities in total with the heaviest weightings going towards the financial (37.6%), energy (26.6%), and industrial (12.5%) sectors. Among the top individual holdings are a series of financial firms, Baoviet Holdings (10.3%), VietNam JSC Commercial Bank For Industry (6.7%), and the Bank For Foreign Trade of Vietnam (6.2%) while industrial giant Petrovietnam Fertilizer & Chemical (6.7%) also finds it way to the top of the list. VNM’s recent history has been interesting to say the least, it was a chronic underperformer in the fall of 2010 but managed to surge in late December and early January to become one of the top emerging market performers in the period. However, continued concern over the health of the Vietnamese economy and questions over its ability to withstand the current crisis of confidence have pushed the fund back down, culminating in this early February drop for VNM. Whether VNM can bounce back and if this devaluation will be able to somehow positively impact the country’s economy remains a mystery but investors in this fund should definitely stay tuned and be on the lookout for any further changes in the country’s monetary or fiscal policies which could signal what the future for Vietnam’s economy is in the years ahead [see Vietnam ETF Surges Higher Can It Last?].

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Disclosure: No positions at time of writing.