THE FUND:

Meeting with Hoa Sen Group in Vietnam.

The fund declined 8.1% Net (SEK) in May compared to the benchmark index which retreated 6.9% Net (SEK). Vietnam’s market experienced a strong correction during May, which started with profit-taking by foreign investors and was later followed by margin calls and forced selling by local investors. The fund’s underweight in blue-chips in Consumer Staples (Masan Group and Vinamilk) and Real Estate (Vingroup and Novaland) was the positive contributor. The IPO of Vinhomes (a subsidiary of Vingroup) and TechcomBank (an associate company of Masan) concluded in the month, lack of trigger in these names resulted in foreign selling. However, as the sell-off spread across the market due to margin calls the fund’s overweight in Financials and Energy contributed negatively. In addition, our off benchmark bet in Hoa Sen Group performed poorly on the back of lower than expected quarterly results. The company is trading at an attractive forward ~P/E 6x. The gross margin declined to 13.5% in the second quarter from 18% in the same quarter in 2017 due to higher depreciation expenses and sales discounts as the company expands aggressively. In addition, the debt backed expansion led to ~2x increase in interest expenses compared to last year.

Going forward, we believe that increasing sales and a gradual decrease in debt levels ahead bodes well for the bottom-line of the company. Given that the macro picture is intact with the economy growing at above 6.5% and credit growth above 18%, select banks focusing on consumer lending, are now trading at attractive levels. Increased liquidity in the market where daily trading value hovers at ~USD 300m while the regulator is working on market reforms such as daily settlement to prepare for Vietnam’s inclusion in MSCI Emerging Markets, should be positive for the brokerage sector, which is trading at ~P/E 10 lower than the market multiple but with superior earnings growth.

THE MARKET:

The Vietnamese market continued its correction in May, losing 6.9% Net (SEK) compared to 2.4% decline in MSCI Emerging Market Net (SEK) and 10.3% in MSCI Frontier Markets xGCC Net TR (SEK). Heavy selling from foreign investors was the primary reason for the market downturn, however, margin call pressure from brokers further exacerbated the situation as local investors turned forced sellers. Liquidity pushed selling took the Index down as low as -12% in May. However, bargain hunters and value investors jumped in during the last week. According to market estimates, margin lending balance is down by 30-40% from the peak and seems to be at a more reasonable level now. Foreign investors were net buyers by roughly USD 1bn in May, however, this includes a foreign investment of USD ~1.25bn in the IPO of Vinhomes. Excluding this transaction, foreigners were net sellers in the market to the tune of ~USD 250m. Average daily trading value during the month stood at USD 309m.

On the macro side things looked much better, PMI Index accelerated to 53.9 from 52.7 in April, signaling towards a resilient manufacturing sector in Vietnam. Inflation increased by 3.86% Y/Y, mainly due to the adjustment in gasoline price and food prices, however, core CPI remained soft at 1.34% Y/Y. The trade balance recorded a surplus of USD 3.39bn in the first 5 months (vs. a deficit of USD 2.6bn in the same period in 2017) while disbursed FDI accelerated to USD 6.75bn (+9.8%).

Valuations have become more reasonable as the market is trading at forward P/E 17 for 2018, estimated to fall to P/E 14 for 2019. Barring any global or domestic shocks, the valuations do not look exaggerated given the strong macro backdrop. During 2017 and to date in 2018 Vietnam has established itself among similar Asian emerging markets, such as the Philippines, Indonesia, and India who have all historically traded at 18-25x earnings. In comparison with this new peer group, Vietnam’s valuations do not look strained at their current valuations.

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.