THE FUND:

Investors testing e-scooters manufactured by Vingroup. Vietnam’s first electric motorbike produced locally.

The fund fell 6.9% net (SEK) in 2018 compared to the Benchmark Index (2.6%) net (SEK). The market has been on a roller coaster in 2018. The broader Vietnam index touched an all-time high of 1,205  increasing 22% from the start of the year however it retreated back to 892 (down 26%) by year-end. The market’s daily traded value improved significantly to USD 275m. While the rest of the Frontier and Emerging Markets were witnessing outflows, Vietnam was able to attract USD 3.2bn in portfolio flows. A majority of the flows were driven by large IPOs (Vinhomes and Yeah One) and secondary placements in large caps such as Masan, Vingroup, Vincom Retail etc. The stock prices of blue chips and index heavy names such as Vincom, Masan, Novaland etc. remained upward sticky in a bear cycle due to foreign flows and corporate actions. Given the exorbitant valuations in large caps, the fund remained heavily underweight in these names, which is the main reason behind its relative underperformance.

The fund’s mid-cap theme did not play very well in 2018. Our off-benchmark bet in Hoa Sen took a severe beating as the US-China trade war posed risks to the company’s exports while China’s cheaper steel found its way to Vietnam. The company is currently trading at 191 EV/ton, one of the cheapest steel producers in the frontier space. We are confident that once the dust settles amid uncertainty in US-China trade war, valuation mean reversion is likely to take place. Another off-benchmark stock in financials, HD Bank, also did not perform well as the bank announced its intention to buy an ailing government bank as part of the government’s plan to restructure the financial sector. This decision raised concerns among investors regarding short-term asset quality and increased provisioning. As we understand, HD Bank will only buy a government bank in return for favors to weather the impact of increased provisioning. On the positive side, our mid-cap bets in real estate (Dat Xanh Group), industrials (Vietnam Electrical) and textiles (TNG Investment) contributed positively. Our natural underweight in large caps in real estate (Vincom Retail), consumer staples (Vina Milk) also added alpha as these stocks were lacking any corporate actions or fundraising and were less supported by the sponsors. The fund continues to remain overweight in financials, industrials and consumer discretionary sectors where valuations are far more reasonable and earnings growth are likely to remain in double digits. Looking forward in 2019, we are cautious about a possible cyclical downturn in the property sector given that supply is gradually exceeding demand with indications of an increase in interest rates. The fund is likely to maintain its underweight in real estate and related sectors such as materials and construction.

THE MARKET:

As we mentioned in the previous section, the market has had a rocky year with the broader Vietnam index touching 1,205, increasing 22% from start of the year but ending the year at 892 (down 26%). Daily traded market value improved significantly to USD 275m. The market ended posting a negative return of 2.6% net (SEK) in 2018 compared to a 7.1% dip in MSCI Emerging Markets and -17.5% in MSCI Frontier Markets xGCC. Impressive portfolio investments in the first half of 2018 and the corresponding increase in the index tapered off as the US-China trade war picked up steam spreading confusion spread across ASEAN markets about China’s possible reaction to US tariffs. In the aftermath of higher tariffs on Chinese goods to the US, the threat of Chinese products being channeled into neighboring countries (especially Vietnam) or being indirectly exported to the US through these countries emerged as key concerns. These could potentially: (i) disrupt demand and supply dynamics in Vietnam (and other ASEAN countries); and (ii) trigger tariffs on Vietnam by the US in order to curb indirect Chinese exports. Portfolio investment outflows (except some blue chips) due to increasing Fed rates and a strong dollar also kept domestic investors at bay. Lastly, due to early lunar year holidays in January, local investors chose to stay away from the market in December, leading to 6.5% M/M net (SEK) decline in the main index in December alone. However, this also brings Vietnam’s market valuations to attractive levels, trading at P/E 13.6 (down from P/E 22 at its peak during first half).

Stock prices aside, Vietnam has proven to be one of the more robust economies in the Frontier Markets space. Its GDP grew by 7.08%, a 10-year high beating all growth estimates. Manufacturing remains the primary driver of economic growth, as also shown by the highest PMI (53.8) among ASEAN countries. Furthermore, FDI disbursements increased by 9.1% reaching USD 19.1bn, also a  record high. Exports increased by 13.8% Y/Y to USD 245bn, 103% of the GDP, resulting in a trade surplus of USD 7.2bn. Given the strong trade surplus and all-time high FX reserves of USD 57.5bn, the Vietnamese Dong remained stable despite turbulence in global currencies. The State Bank did, however, let the currency devalue by 2% to remain competitive in the exports market.

Going into 2019, we foresee that a potential US-China trade deal could emerge as the biggest trigger for Vietnam’s stock prices to reflect its fundamentals and robust economy. Corporate earnings are forecasted to grow at more than 15% while valuations are much stretched compared to last year.  If we remove the top 5 names in terms of index weighting, the multiples are more attractive and stand at P/E 11.3.

DISCLAIMER:
Capital invested in a fund may either increase or decrease in value and it is not certain that you will be able to recover all of your investment. Historical return is no guarantee of future return. The Full Prospectus, KIID etc. are available on our homepage. You can also contact us to receive the documents free of charge. Please contact us if you require any further information: +46 8-5511 4570.