Arthur: Vietnam ETF Still Looks Good

May 15, 2014

A money manager takes a good look at a ‘bad’ trade and talks about it openly.

This is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Kim Arthur, chief executive officer and founding partner of San Francisco-based Main Management.

Almost three months ago, we recommended frontier investing with VNM, the Market Vectors Vietnam ETF (VNM | C-36). It hasn’t gone terribly well so far, but I’m sticking to my guns, and here’s why.

Less than a month after the recommendation, the risk-on investing environment turned decidedly risk-off, and we have seen the Russell 2000 Index and Nasdaq Composite move down while the broader cap-weighted market indexes have remained in the black. Through May 9, for example, the Russell 2000 fell 4.37 percent, vs. a 2.2 percent increase for the S&P 500 Index.

Importantly, this sentiment correction has not been supported by a collapse in the fundamentals or a looming recession. I’m alluding to data showing that since 1966, all bear markets have been in front of or during a recession, with the exception of 1987.

Instead, first-quarter earnings per share will be up more than 6 percent, despite almost no growth in gross domestic product (GDP) in the quarter. The second quarter of 2014 is slated to have 8 percent-plus EPS growth and a rebound of GDP to 2-3 percent after a weather-impacted first quarter. Full-year S&P 500 Index earnings estimates are $120, up from $118 at the beginning of the year, according to Adam Parker of Morgan Stanley.

To return to our Vietnam investment, VNM is down 12 percent since we wrote about it here on on Feb. 21, 2014, while the iShares Micro-Cap ETF (IWC | B-78) down 7 percent. Micro-cap represents a good risk-on alternative.

We wanted to give you an update on some of the investment considerations to see if the secular story of VNM is still in place. The context of this re-examination is, as I noted above, an piece I wrote in February on why we own VNM, titled “Arthur: Frontier Investing with VNM.”

For all of 2013, Vietnam’s GDP grew at 5.4 percent. For the first quarter 2014, GDP grew at 4.9 percent, driven by the service sector, which grew at 6 percent. Helping to fuel this growth is a continued explosion in exports, which are estimated to grow at 20 percent in 2014.

The U.S. is 14 percent of Vietnam’s exports, driven by strong handset demand, which grew by 67 percent in 2013. China is 9 percent of exports and continues to grow, but has recently been in the headlines of East Sea territorial claims that we will address later in this article.

The currency has been stable this year after devaluation in 2013, and looks to remain stable, with a current account surplus of $1 billion year-to-date and $40 billion of foreign reserves, which can be used if necessary.

Finally, inflation, which was in double digits, is now running at 4.4 percent, which is the lowest rate in the last five years. With recent reductions in the interest rate on bank deposits from 7 to 6 percent, depositors are being paid a real rate of 160 basis points. While this is good, equities do provide a higher potential, albeit with greater risk of capital.

Another continuing driver of the Vietnamese economy has been the privatization of the state-owned enterprises (SOE), which are still more than one-fourth of GDP and have not been as productive as the private companies.

Since inception, 4,000 of these companies have been privatized, with 180 occurring during the 2011-2013 period. For the next two years—2014-2015—more than 430 SOEs are scheduled to be sold off, with proceeds used for financing the budget and to increase efficiencies for the Vietnamese economy.

Additionally, noncore SOEs can be sold at less than market value to encourage investor participation. Previously, such transactions were penalized, and subsequently rarely done. The current list of companies that will be privatized between now and the end of next year includes:


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