EEMA - VanEck Vietnam ETF: Unsteady Macros But Risk-Reward In A Better Place

2023-06-29 09:51:25 ET

Summary

• The VanEck Vietnam ETF offers exposure to 46 Vietnamese stocks, primarily small-cap, and has an annual turnover rate higher than most ETFs, suggesting a significant part of its performance will be driven by the fund manager's timing.
• Despite a strong GDP performance in FY22, Vietnam's economy has slowed this year mainly due to a weak trade backdrop.
• Domestically, there is potential for growth in H2 as inflation decreases and the central bank cuts rates to boost local demand. Long term, the growing prosperity in Vietnam could lead to outperformance.
• From a technical standpoint, VNM's risk-reward ratio relative to a diversified EM ETF looks attractive, despite its forward valuations being roughly on par with the EM ETF and lower than EM Asia.

ETF Profile and Recent Track Record

The VanEck Vietnam ETF (VNM), with a listing history of roughly 14 years and over $500m in AUM, offers coverage to 46 Vietnamese stocks. Prima facie, with a weighted average market cap of over $4bn , this has the feel of a mid-cap based portfolio, but the bulk of the 46 names (close to ~75%) consists of small-cap stocks or those with a market cap of less than $1bn. Incidentally, VNM does not offer any exposure to large-cap names; this may be attributed to the fact that the Vietnamese market, has traditionally been quite underdeveloped and has only witnessed a spike in trading volumes over the last two years. As things stand, there are currently only around 50 stocks with a market-cap of over $1bn.

Investors should also note that if you buy VNM at a certain point, you're unlikely to get the benefit from the long-term appreciation of over half the stocks, as it is susceptible to annual churn. For context, most ETFs typically churn one in three stocks within their portfolios, but for VNM its annual turnover rate works out to over 57% . This suggests that a good part of the alpha will likely be driven by the fund manager's ability to effectively time his (Peter Liao & Co.) entries and exits in half the portfolio.

The past 12 months haven't been too fruitful for both the emerging market space ( EEM ), as well as the more focused Asian-based EM portfolio ( EEMA ). VNM was no exception to this negative return trend and has in fact, fared a lot worse.

Questions may well be asked about the quality of stock picking last year; whilst both EEM and EEMA were not able to generate ample excess returns (over the risk-free rate) considering the degree of risk taken by those funds, only VNM saw a negative Sharpe ratio, implying the performance couldn't even match the risk-free rate!

From an income angle as well, even though VNM is trading at rather low levels compared to where it was at the end of FY21, the yield is nothing to shout home about at just 0.84% (despite the inclusion of a special dividend last year). Conversely, the likes of EEM and EEMA offer far superior yields at roughly 2-3x higher.

Macros

After a terrific GDP performance in FY22 where growth came in at 8%, things have begun to slow this year, with Q1 GDP of just 3.3%. This was largely driven by a weak export performance (for context, exports account for a sizeable 93% of the nation's GDP)

Even though Vietnamese exports have been getting a fillip from recent ASEAN Free Trade Agreements ((FTA)), don't write off the impact of slowing growth in the US and the EU which jointly account for 40% of the country's exports. The image below highlights the drastic impact of those two regions on the overall export performance.

Within the export basket, smartphone shipments typically tend to dominate proceedings, but this clearly looks like one of those segments that's in a freefall with Q1 global smartphone shipments slumping by 14%.

New export orders have now been on a downward trend for three straight months, and considering how vital this component is, it is asking for a lot when you learn that Vietnam was initially expected to grow at 6.3% for the FY. With only 3.3% growth seen in Q1, a lot could be expected from the domestic economy in H2 to mitigate the adverse impact on the external front.

In fairness, domestically, things may have the potential to flourish in H2. Firstly, inflation looks to be on the way down, and will continue to embolden the central bank to cut rates to boost local demand. A couple of weeks back, the State Bank of Vietnam cut its key benchmark rates by 50bps, the fourth policy adjustment this year, and it appears that there will be some political pressure to press the pedal down even further.

Besides the oft-quoted re-shoring and export angles, one other tailwind backing the VNM investment case is the growing prosperity in the nation. It is believed that in another 12 years, half the population will crossover to the middle-class bracket, providing some context on the potential consumer spending momentum that could snowball over time.

Closing Thoughts - Valuation And Technical Backdrop

The last time we covered VNM, we weren't gung-ho about the risk-reward on offer; at this juncture the R:R is in a better place though not quite in the most opportune place to pull the trigger.

The standalone weekly chart shows that from the start of 2022 until November 2022, the VNM ETF had been trending lower in the form of a descending channel. Since then the price action had been flattening out, within a range of $11-$13. The channel came to an end in March this year, and last week we saw a bullish engulfing green candle breakout from the upper boundary of the range. We believe investors should wait a few more weeks to ascertain if this is a false breakout or if the price is able to build a base above the $13 levels.

It also appears that VNM's risk-reward relative to a diversified EM ETF looks rather attractive. Currently, the relative strength ratio of these two products is rather low at 0.34x, ~42% off the mid-point of the long-term range. Even if you think VNM may never quite hit the mid-point of the range (given the long-term descending trend of this ratio), note that it still has some potential to retest the downward-sloping boundary of the RS Chart (at the 0.425x).

Finally, it's also worth highlighting that even though VNM's forward valuations ( 12.4x ) are roughly on par with the EM ETF, and ~10% lower than EM Asia, the portfolio is still on course to deliver much superior 5-year earnings growth relative to those two options (+800 bps differential).

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