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Outperformance and opportunity for VietNam Holding

VietNam Holding (VNH) released its half-year results for the period from 1 July 2022 to 31 December 2022. Shares fell 16.8% in USD, however the company still outperformed the benchmark Vietnam All Share Index, which was down 20.5%. The fund’s NAV per share declined by 30.1% against a 39.8% decline in the VNAS. During that period the fund maintained its outperformance on a one, three, five, and ten-year basis. The discount remained fairly stable during the period and closed at around 15%. Despite the well-documented challenges experienced in the second half of 2022, the Vietnamese economy actually performed reasonably well as it established itself as a reliable alternative for Chinese production. 2022 was a record year with its decade-high levels of GDP growth (8%), record levels of Foreign Direct Investment, and unmatched trade surplus. Unfortunately, this did not translate to equity performance. Despite continuing uncertainties globally, 2023 could prove finer for Vietnam. Investors are starting to return to the country’s stock markets, with net inflows recorded for the first time since 2019. Additionally, as detailed in the company’s interim report, the market appears to be at historically cheap levels of valuations accompanied with good growth prospects. 

The investment manager had this to say about the outlook for the Vietnamese economy:

“Vietnam’s trade levels are close to 200% of GDP – making it one of the most open economies in the world. Although the country has a diversified mix of trading partners, it will not be able to escape global headwinds resulting from economic recession in those export markets. Trade levels in December showed slowing demand for many goods, and it could take several months for inventory levels and demand levels to normalise. In Vietnam’s favour is the fact that it produces a wide range of goods, and in many instances is a low-cost producer. Although demand may fall for some categories and therefore impact employment at the factories and industrial parks, the country will still be expected to earn foreign exchange from the many basic commodities it produces in quantity, including coffee, rice, rubber, pork, fruit and vegetables. The latter categories may also see firmer demand from China as the country opens-up from strict Covid restrictions.

“Domestic spending on public infrastructure is expected to be a strong catalyst for economic growth in 2023. The Government was running behind its plans in 2022 but has earmarked a total of USD 30 billion for 2023. This may provide a buffer against headwinds from the global trading partners, many of whom may be close to or entering, recession in 2023. The domestic infrastructure expenditure is expected to cover core sections, including road and rail infrastructure. Improvements in these areas will support greater productivity for Vietnam’s manufacturing centres and have a knock on or multiplier effect for the economy as a whole. Vietnam is still a rural-based country with urbanisation at less than 40%. While the country has made good strides in digital Infrastructure – mobile phone penetration is high and internet connectivity is affordable for much of the population – the arterial road network requires further development and the railway connections between the major cities need significant upgrades. A long-term project to connect Hanoi and Ho Chi Minh City in six hours with a high speed ‘bullet-train’ was reignited in 2022 and has been cited as one of the ways to help Vietnam deliver on the promises of Net-Zero by 2050. The single-track rail line today is old (completed in 1936) and slow, as the 1,726-kilometre journey between the cities takes more than 30 hours. Air-travel is the main commercial alternative, and the two-hour flight is the fourth busiest domestic air route in the world, according to the Director of the Civil Aviation Authority.

Vietnam was quick to open to foreign visitors in 2022 and, as the Chairman notes, the Board of the Fund has visited the country twice over the last twelve months. The rebounding effect of tourism should continue in 2023 and may be accelerated by the return of Chinese tourists in the second quarter, perhaps when the peak of recent Covid infections in China has passed.

Although domestic investors have been nursing their wounds, as mentioned before, foreign investors have started returning to Vietnam’s stock market, attracted in part by historically low valuations with the overall market on a Price to Earnings ratio of 10x. As a result, 2022 saw the first net foreign inflows since 2019. Vietnam is still a frontier market, and ’emerging’ status is elusive for now. 2023 should see the implementation of a new stock exchange infrastructure, but until foreign investors are convinced that there is a level playing field in terms of market access, Vietnam will remain the most developed of the Frontier Markets and the largest for some time to come.”

VNH: Outperformance and Opportunity for VietNam Holding

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