Vietnam’s economy is on fire. Gross domestic product growth hit a 25-year high of 8% last year. Foreign direct investment surged to $22 billion as multinational corporations sought alternatives to China.
So why is its stock market barely flickering? Global emerging markets have rallied by 9% since Nov. 1. The
VanEck Vietnam
exchange-traded fund (ticker: VNM) did nothing. It’s down by half from a peak in early 2022.
The culprits are usual suspects for meltdowns in emerging markets, and not only emerging markets: overleveraged real estate and political shifts that may not be in investors’ favor.
Vietnam’s Communist authorities are less than transparent in assuaging capitalists’ fears. “We’re not re-entering Vietnam yet because the systemic fallout from the real estate bond crisis is still unknowable,” says Alison Graham, chief investment officer at frontier markets specialist Voltan Capital Management.
Easy money and postpandemic boomerang spending stirred developers’ animal spirits in Vietnam. The government, scarred by banking crises earlier this century, limited bank lending. So builders turned to the new alchemy of the bond market.
Advertisement – Scroll to Continue
Banks snapped up these bonds and bundled them for retail investors, promising double-digit returns instead of the 3.5% or so they were paying on deposits. Sound familiar yet?
The first prick in the bubble came last October when authorities arrested the chairwoman of go-go developer Van Thinh Phat Holdings Group on fraud charges. It won’t be the last, predicts Abhijit Kukreja, senior vice president of emerging markets equities sales at Auerbach Grayson.
“The bond market is frozen. Vietnam will go through its
Evergrande
moment,” he says, referring to fallen high flyer China Evergrande Group.
Advertisement – Scroll to Continue
Vietnam’s normally placid politics are roiled, too. A scandal involving alleged price gouging on Covid test kits forced the resignation of business-friendly President Nguyen Xuan Phuc in January. Charges of “violations and wrongdoing” masked a reactionary power play by aging Communist Party boss Nguyen Phu Trong, says Jonathan Binder, chief investment officer at Consilium Investment Management.
The new president is a former Party propaganda chief who kicked off his term urging “steadfastness in creative development of Marxism, Leninism, and Ho Chi Minh thought.”
“I see a parallel with China: using anticorruption as an excuse to consolidate power,” Binder says.
The good thing about market collapses is that they can yield attractive prices for solid companies. Kukreja presents a shopping list of Vietnamese blue chips that offer great long-term value:
Bank for Foreign Trade of Vietnam
(VCB.Vietnam),
Vietnam Dairy Products
(VNM.Vietnam),
Saigon Beer Alcohol Beverage
(SAB.Vietnam), and IT services champion
FPT
Advertisement – Scroll to Continue
(FPT.Vietnam). “We still think Vietnam is very well placed for decades to come,” he says.
Voltan’s Graham is not so sure. Industrial investors in Vietnam face a welter of infrastructure challenges China has already solved: roads, ports, land acquisition, electricity. “The basic Vietnam growth story is intact, but without some of the hyperbole,” she says.
Another big risk factor: Domestic investors, many of them novices, account for 90% of Vietnam’s stock trading, Graham says. Foreigners’ holdings are capped in the most sought-after companies. That would make the market volatile under any circumstances.
Vietnam’s transformation certainly bears watching, carefully.
