VCVOF - VNM: Improvements Made But CEFs Still Preferred For This New Vietnam Bull Market

2023-08-07 12:48:52 ET

Summary

• The VanEck Vietnam ETF has made changes to its structure, now only tracking locally incorporated Vietnamese companies listed on Vietnam exchanges.
• The expense ratio for VNM has increased slightly to 0.66%.
• This Vietnam stock market ETF has experienced disappointing long-term performance, but recent policy measures and a favorable economic backdrop suggest potential for future growth.

VNM ETF Summary

The VanEck Vietnam ETF ( VNM ) according to its latest factsheet , "seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MarketVector™ Vietnam Local Index (MVVNMLTR), which tracks securities of publicly traded companies that are locally incorporated in Vietnam."

VNM tracking locally incorporated Vietnamese companies is a new feature made in March 2023. Previously it made an allowance to include companies incorporate outside of Vietnam, in cases where such companies had at least 50% of assets/revenues in Vietnam.

I last reviewed VNM approximately one year ago here . Amongst other factors, I viewed the fact it regularly held securities listed outside of Vietnam as a negative. It was not unusual (as was the case back then), for this ETF to hold circa 20% of the portfolio in companies listed in markets such as Taiwan, South Korea, and Japan.

Below is the top 10 country exposure from one year ago.

Now the most recent country exposure has been simplified.

I view these structural changes to the ETF they have made since my last review as a positive step in the right direction. I do note though the expense ratio looks slightly higher now at 0.66% compared to 0.59% when I reviewed it last year.

Why the changes made to VNM ETF matter

Only time will tell if these changes to the VNM ETF will produce better returns going forward than what otherwise would have occurred. What I am more convinced of, however, is that most of the investors in VNM ideally prefer all the holdings to be listed on the Vietnam exchanges rather than other countries. Assuming that is the case, it is more likely to result in a larger and more liquid ETF that can pave the way for a more competitive expense ratio in the future.

Given I am relatively bullish on the Vietnam stock market in general, I also do happen to view these changes as positive for the underlying future returns. As I shall explore later, I see ample room for P/E multiple expansion in the Vietnam stock market. If this ETF persisted with the old structure of having some holdings tied up in stocks listed in Taiwan, South Korea, etc., it is possible these holdings miss out on benefiting from such P/E expansion. For example, although the companies may have more than 50% of their revenues from Vietnam, the stock may trade cheaper if it is listed elsewhere on a stock exchange that happens to be in the doldrums at that time.

Other countries' stock market investors also may be less familiar with the Vietnam fundamentals and less willing to pay up as much for such stocks.

VNM ETF long-term performance

When we look at the long-term performance of this ETF, there is no escaping the fact that has been disappointing since its inception back in 2009.

Long-term numbers such as above may at a glance lead some investors to avoid Vietnam altogether. It is important to note though that the Vietnam stock market has generally been a good place to be over the last decade.

From the chart above, a Vietnam stock market investor really should have expected more like double-digit annualized returns rather than slightly negative such as with VNM.

The disappointing performance of VNM ETF since inception could be put down to a range of factors. I have already discussed one, in that holding overseas listed businesses during a relatively strong run in Vietnam stocks in recent years has not helped. This will now not be a factor in the future.

Other reasons for the poor historical performance may be less of an issue in the future. The Vietnam stock market does not have a long history compared to others, as it was only established in the year 2000. Compared to now, it was likely easier for active managers to pick better stocks than this ETF owned when it first started back in 2009. Although I am still in the camp that believes active managers still have an edge in Vietnam, I would at least expect this to be less pronounced as it has in the past.

We are currently in a bull stock market in Vietnam

As evidenced on the 10-year Vietnam stock market chart I posted earlier, we have had a very noticeable bounce in Vietnam stocks since the lows of late last year in mid-November. In fact, it makes it one of the stronger global stock market performers we have seen in this time, with gains of circa 35%.

For those investors who prefer to get aboard investment trends when they have been confirmed to be underway and with catalysts, the Vietnam market currently fits those criteria. The month of June saw trading volumes reach their highest point in a year, led by a surge in retail participation and continuing improvement in interest from foreign investors. Importantly, despite such a large bounce from recent lows, valuations are still quite appealing. We can gain comfort from not only a low forward P/E of the market but also a low multiple in terms of its historic range.

Catalysts for this uptrend in Vietnam stocks primarily include favorable policy action on both monetary and fiscal policy sides. I shall now further explore some of these policy measures, which have led to a bounce back in confidence from Vietnam stock market investors.

Vietnam began cutting interest rates early this year

Back in March this year the Vietnam central bank cut rates for the first time in two years and they have followed up with further downward movement in rates since then.

This is noteworthy on a few fronts. Many global central banks were still tightening monetary policy at this stage. Even though Vietnam has begun its rate-cutting cycle, expectations are that there is further room for additional rate cuts in the future. This makes for a comfortable backdrop for Vietnam stock market investors, where we have a coordinated move to fuel economic growth from both monetary and fiscal policies . Such a backdrop has been increasingly rare to find amongst global stock markets in recent times.

Vietnam extends its cut in VAT along with other stimulatory moves

One example of such coordinated moves is Vietnam announcing in June another reduction in VAT to span from July to December this year. These stimulatory moves have been made possible due to their inflation rate peaking around 5% early this year, somewhat tamer than many other countries.

Vietnam's relatively comfortable level of debt to GDP has also enabled it to undertake a much-needed big boost in infrastructure spend this year. This comes at an ideal time as the economy experiences a moderation of growth due to the slowdown experienced by its major export partners.

In a recent midyear update, VinaCapital chief economist Michael Kokalri notes that " Vietnam's government aims to increase infrastructure spending from 4%/GDP in 2022 to 7%/GDP in 2023, which would help support the country's long-term economic growth".

Overall when looking ahead at 2023 for Vietnam's economy , VinaCapital describes a bifurcated economy. One where the slowdown is being felt by those exporting the "Made in Vietnam" products to consumers in the US and Europe, but there is some confidence within the local consumption story. Confidence is being boosted by a strong rebound of foreign tourist arrivals in Vietnam, China re-opening, and the government's infrastructure spend that I just mentioned. Whilst GDP will slow significantly from last year, we are still talking about circa 5-6% growth, which most of the world would be envious of.

Government measures have also calmed investor fears from late last year regarding the state of Vietnam's corporate bond market . Whilst further progress is needed in this area, we are seeing increasing confidence such progress will eventually come.

Where to look for favorable demographics and strong GDP?

It is rare to find a favorable stock market environment to invest with a tailwind where GDP growth of around 7% has been considered normal for a long time. More than a decade ago many would consider China, however, nowadays investors are increasingly shunning China and some of these investors will look for other high-growth countries instead.

In that context, I am not surprised that India has been a popular emerging market in recent years. Aside from strong GDP, a favorable demographic story is often sought by global stock market investors. This is also a factor that is leading to investors avoiding China. At the same time, it has been a positive factor cited in India's strong stock market lately.

The Vietnam demographic story is not as favorable as India perhaps, but they do boast a cheap and efficient young manufacturing workforce.

I would expect this bullish move in Vietnam stocks to slowly capture more attention from global investors soon as a result of many searching for areas of growth. I don't expect the Vietnam stock market to get near the P/E multiples we see for India as an example, but I nonetheless see plenty of room for some P/E expansion.

VNM ETF's latest holdings, sectors, and fund data

Vietnam ETFs vs CEFs

Before one rushes out to buy VNM based off the promising prospects for Vietnam stocks that I have discussed, I would point out that there may be better alternatives.

Of course, I shall start with the usual disclaimer that past performance may not be indicative of future results. Yet it is difficult to ignore the fact that three London CEFs that have been around for a long time have done significantly better.

For those interested, a year ago I previously reviewed the VinaCapital Vietnam Opportunity Fund , which also has a US listing.

I expect a favorable backdrop for Vietnam stocks though in the decade ahead to see that VNM does far better than the slightly negative performance in the past decade.

It was only very recently (March this year), that changes to the structure (removing offshore listed holdings), occurred.

Suffering longer-term VNM holders would at least be pleased with a huge jump in the NAV in July. Also, they appeared to perform better in a relative sense vs other Vietnam equity fund products in the last year. In terms of the 12 months' performance of various Vietnam equity funds , they came in the top half of a table of 14 funds.

Conclusion

Vietnam stocks have made large gains since their lows late last year in November. Despite the big move, tailwinds as discussed favor a continuation of this uptrend over the medium to long term. These include expansionary monetary and fiscal policies whilst valuations remain cheap. I, therefore, expect the VNM ETF to produce reasonable returns in the future, albeit still less than actively managed Vietnam CEFs.

Like we have seen in the last decade, there is still a risk that VNM delivers relatively flat returns in an era where the wider Vietnam stock market posts solid gains. This risk has been reduced though from the structural changes I discussed earlier, that will see VNM stick to holdings only listed in Vietnam. The ETF will still at times lack exposure to Vietnam's up and coming companies and those that have tighter foreign ownership limits. As the Vietnam stock market continues to mature and grow though, I expect the performance of VNM to not underperform the Vietnam active managers to the extent seen in the past decade.

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