Investing in the Jewel of Southeast Asia

I can’t say what made me fall in love with Vietnam — that a woman’s voice can drug you; that everything is so intense. The colors, the taste, even the rain. Nothing like the filthy rain in London.

–Graham Greene, “The Quiet American”

In his poetic and cautionary anti-war novel, “The Quiet American,” Graham Greene writes of the seductive nature of Vietnam. The smells that promise, “Everything in exchange for your soul,” and the sweltering heat that overcomes you so intensely, “You can hardly remember your name, or what you came to escape from.”

For Americans, the dark cloud of history continues to waft over the very concept of “Vietnam.” War, loss, failure and geopolitical folly all invade our thoughts.

To this day, some 40-plus years after the fall of Saigon, most Americans still have yet to really appreciate this Southeast Asian country for what it is today.

And what it is today is, among other things, an increasingly smart place for global investors to risk their capital.

Foreign Owners Now Welcome

Over the past three months, the Market Vectors Vietnam ETF (VNM) has quietly entered a major uptrend.

Even as the U.S. stock market is locked in a grinding trading range, the benchmark measure of the Vietnamese equity markets has soared 17.5% since April 7. The bullish action over the past week has sent VNM above key resistance at the 200-day moving average for the first time since November.

The chart below shows the concerted move off of the April lows, as well as the late June/early July spike.

So what’s the reason behind this latest surge by VNM?

On June 26, Vietnam’s Prime Minister Nguyễn Tấn Dũng signed a decree abolishing the foreign ownership limit of 49% for publicly traded companies, beginning Sept. 1.

The relaxing of Vietnamese corporate ownership rules means international investors can fully own domestic listed firms, except those in sectors deemed “sensitive” by the government.

That level of openness is a surprise.

Even optimistic global investors like me were only expecting a relaxation in the foreign ownership rules to about 75% of total ownership.

The new rules allowing up to 100% foreign ownership is more than most Vietnamese equity bulls could have hoped for. That accounts for the big move into VNM — a move that is likely to continue well beyond just the current short-term trading spike.

Hacking Through the Regulatory Jungle

As is often the case in countries where the government exerts controls over financial markets, the current restrictions on foreign capital ownership of Vietnamese firms have been a big barrier to developing the country’s capital markets.

The prior ownership peak of 49% had already been reached by more than 30 of Vietnam’s biggest companies, and another dozen or so blue-chip firms are slowly approaching that 49% ceiling. According to some estimates, this latter group accounts for about 30% of the market capitalization of the Vietnam stock exchange.

Now that fresh capital is allowed to swoop in and buy shares in the best-of-breed Vietnam stocks, look for a capital invasion from the United States that’s bigger, and much more benign, than any previous bellicose foray into this jewel of Southeast Asia.

While the liberalization of foreign ownership rules is a positive for foreign investors, it’s also a big positive for Vietnam. Absent a large amount of foreign investment, the Vietnamese equity market has been hamstrung by a lack of liquidity. This lack of liquidity has kept the Vietnamese equity markets trading at a 25-30% discount to regional peers. That liquidity-driven “catch up” alone allows for substantial rises in the stock market.

The new rules also are likely to bring more listings onto the stock exchange and help kick-start government privatization plans for many state-owned firms.

Finally, if the new liberal ownership rules here weren’t enough, consider the encouraging environment offered by the Vietnamese economy.

Vietnam’s annual gross domestic product (GDP) growth rate is among the most robust in the world. According to The Economist, the country’s real GDP growth is expected to hit a healthy 6% year on year in the first quarter of 2015.

I now expect full-year growth in 2015 to come in at an even higher 6.3%, boosted by the prospect of strong demand for Vietnam’s diversified export products.

Add to this bullish mix favorable demographics, an inexpensive manufacturing base, accommodative monetary policy and massive tailwind of low global oil prices, and the bright future of investing today in Vietnam stands in stark contrast to its dark, war-torn past.

In case you missed it, I encourage you to read the e-letter column from last week about why I’m chomping at the bit to buy a certain market. I also invite you to comment in the space provided below my commentary.