VNAM - VNM: Still An Attractive Frontier Market Growth Story

2024-01-08 05:07:32 ET

Summary

• After a challenging 2022, Vietnam equities rebounded strongly through last year.
• While valuations are higher now, they remain undemanding on a relative basis.
• VanEck's Vietnam ETF remains the go-to US-listed vehicle for country-specific exposure.

Having turned the page in 2023, Vietnam's emergence as one of the more promising equity markets in Asia looks poised to continue. Even after last year's rally, stocks haven't quite recouped its 2022 losses – the result of monetary tightening and a major bank failure (Saigon Commercial Bank), as well as broader contagion concerns . Vietnamese corporates aren't out of the woods just yet, though, as financial stress continues to manifest in elevated bad debt, slower bond issuances and real estate activity. But the rate of change is positive, as Fitch's recent sector-wide upgrade showed - no doubt helped by supportive government policies, e.g., (corporate bond maturities and loan repayment extensions) and an aggressive monetary easing cycle. Quarterly reporting from Vietnam's major banks support an improved outlook as well – potentially stressed 'group 2' loans are now trending in the right direction , paving the way for a credit resurgence.

Despite these positive signals, the benchmark Vietnam index still largely reflects a cautious investor base. In contrast with consecutive years of region-leading GDP growth (mid to high-single-digits %), Vietnamese equities remain well below pre-COVID price levels. And valuation-wise, stocks are similarly at a historical discount at ~12x consensus 2023 earnings (vs. low double-digit % 2024 earnings growth), only slightly above where they were when I last covered Vietnam.

There's likely more room for upward earnings revisions into 2024, given monthly export numbers (a proxy for top-line growth) are pointing to a near-term recovery. Over the long-term, the country's advantageous positioning as a low-cost manufacturing hub (for both sides of the geopolitical axis) also underpins an attractive long-term runway. Ahead of inclusions into major global emerging market indices like the FTSE Russell (and potentially even MSCI down the line), the VanEck Vietnam ETF ( VNM ) is worth a look, in my view.

VanEck Vietnam ETF Overview – Still the Cheapest US-Listed Play on Vietnam

VanEck's Vietnam ETF replicates, before expenses, the total return performance of the MarketVector™ Vietnam Local Index, a portfolio of Vietnamese listings subject to size (>$150m), liquidity (>250k shares traded monthly) and weighting (<8%) requirements. The ETF currently manages ~$531m of assets and maintains a net expense ratio of ~66bps (50bps from management fees) – a slight premium to closest ETF comparable, the Global X MSCI Vietnam ETF (VNAM). The latter is thinly traded, however, and after incorporating its wider bid/ask spread (66bps vs. 8bps for VNM), the VanEck Vietnam ETF still comes out ahead on price.

The fund is now slightly smaller at 47 holdings in total and has seen some reshuffling over the last quarter. VNM's most notable sector shift is a higher Real Estate allocation (up to 29%), while Financials (mainly comprising banks and brokerages) moves slightly lower to 27%. Consumer Staples, the third-largest component, has been slightly cut to 19%, along with Materials (down to 12%) and Industrials (unchanged at 10%). While this represents a fairly concentrated sector profile, it is consistent with key comparable VNAM (an MSCI Vietnam Select 25-50 Index tracker), as well as other Vietnamese benchmark indices.

The single-stock allocation has seen some changes over the last quarter – the most notable being an increased portfolio weighting to conglomerate Vingroup (8.3%). Dairy producer Vinamilk also gains share at 8.1%, with property developer Vinhomes unchanged at 7.5%. Other meaningful exposures include commodity producer Hoa Phat Group and state-owned Vietcombank at 6.5% and 6.0%, respectively. VINAM retains a similar makeup, albeit with more concentration than VNM due to the latter's strict 8% weighting cap (reviewed quarterly).

VanEck Vietnam ETF Performance – Closing 2023 on a High; Still Well Below Historical Levels

VNM has started 2024 on a positive note, rising +0.6% to date, following a +16.0% total return in 2023 (+15.0% in market price terms). By comparison, the more concentrated VNAM fund (launched in 2021) has lagged VNM over the last year, returning +12.8% and +13.0% in NAV and market price terms, respectively. Relative to pre-COVID levels, on the other hand, the fund hasn't quite clawed back its ~44% loss in 2022. In turn, the annualized NAV performance over longer timelines still doesn't make for great reading – over the last five and ten years, VNM has returned an underwhelming -1.2% and -1.8%, respectively. As for its track record since inception in 2009, VNM has annualized deeper in the red at -2.7% (market price and NAV terms).

One key positive for VNM is its narrow (fee-adjusted) tracking error - over the last year, the manager maintained a ~150bps delta to its benchmark MarketVector™ Vietnam Local Index. Given the higher transaction costs associated with frontier market equities, this represents a very respectable result, in my view. While VNAM offers a similar index spread, VNM's lower tracking error over longer timelines (80-90bps) favors the VanEck-managed fund, particularly when you also factor in the higher VNM liquidity and, by extension, narrower bid/ask spreads.

VNM hasn't distributed very much in the past, but the 2023 payout surprised to the upside, moving the trailing twelve-month yield to 5.2%. As a result, key comparable VNAM is now the lower-yielding option (2.4%). While I wouldn't rule out higher distribution yields as Vietnamese equities continue on their recovery path, this hasn't historically been a great place for income, so I wouldn't underwrite sustained mid-single-digit % yields going forward. That said, the exposure to cash-generative franchises in relatively defensive sectors like banking and consumer staples, as well as a property sector likely on the verge of a cyclical upswing mean investors should still benefit from a nice income bonus ahead.

VNM's underlying earnings valuation multiple has re-rated slightly since the year-end rally and now stands at ~17x on a trailing twelve-month basis - in line with VINAM. In absolute terms, the headline number might seem rich; relative to earnings growth and historical levels, however, the forward P/E screens very reasonably. Beyond the next year or two, Vietnam continues to offer a highly attractive economic backdrop as well, given its sustained mid to high-single-digits % GDP growth pace and appeal to both sides of the geopolitical divide as a low-cost manufacturing hub. This economic growth has also been translating into earnings, and thus, I have no issue underwriting a region-leading low-double-digit % earnings outlook (per consensus estimates) for Vietnamese large-caps.

Still an Attractive Frontier Market Growth Story

Investing in Vietnam comes with a fair bit of risk, but current valuations leave quite a bit of safety margin as well. After all, the long-term fundamentals are as strong as ever, with the country shaping up to be the next global low-cost manufacturing hub – timely as China grapples with external (e.g., geopolitical tensions with the West) and structural issues (e.g., a demographic reversal). In the near term, it's not quite 'goldilocks' yet, but the worst looks well and truly behind us, with all-important export numbers and domestic financial stress on the mend. In the event we see a global rate cut cycle in the coming months as well, Vietnamese equities are well-placed to benefit.

These positives likely aren't priced in here - VNM might not seem cheap on trailing numbers, but roll earnings one or two years forward, and valuations start to look quite compelling (relative to both historical levels and underlying growth). Alongside potential index inclusion catalysts, as Vietnam transitions from 'frontier' to 'emerging' market, I continue to favor an appropriately sized VNM allocation.

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