The Market that will Emerge After the Emerging Markets
By William Patalon III
Managing Editor
It’s either the “New China” or “New India” – depending who you ask.
It’s easy to understand how this country ended up with these labels, for there’s a heck of a lot to like about this fast-growing acolyte of China.
Among the highlights:
- More than half its population is under 25 years old.
- At 2%, its unemployment rate is among the world’s lowest, trailing Azerbaijan, Cuba, Iceland, Andorra and Liechtenstein.
- Yet its labor and production costs are about roughly one-third that of China’s, making it a worthy rival in the bidding for new production sites.
- The economy is advancing at an 8% average annual clip, second only to China among Asian nations.
- It shrugged off the 1997 “Asian Contagion” financial crisis and averaged 5.5% growth for each of the next two years – while other nations in the region saw their own economies shrink.
- It became a member of the World Trade Organization late last year.
- It’s home to one of Nike’s largest factories
- And last November, Intel chose it as the site of a new $300 million computer-chip-testing facility.
The country in question is Vietnam.
In the short term, investors can expect the turbulence to continue.
But for investors or entrepreneurs who are looking for the “next” phase of the emerging-markets boom, Vietnam will be one of the next great growth stories in Asia.
Let me explain …
A Ride on the Wild Side
Over the past 12 months, the Vietnam Stock Index has sent investors on the wildest ride in its seven-year history.
“At the time, the stock market was immersed in what was described by media and analysts as a ‘securities fever,’” the Vietnam Financials website wrote in a first-half market wrap-up that featured the title, “Stocks in the First 6 Months: Lots of Sweet and Bitter”. “Experts talked about skyrocketing securities prices and predicted the bubble, which could cause the collapse of the stock market. The collapse did not occur,” despite the numbing gyrations investors experienced after the market hit its all-time high in mid-March.
The Vietnam Stock Index was created on July 28, 2000, and given a base index value of 100.
A year ago today, the index closed at 507. A subsequent sell-off dropped the index down below the 400 level early late August. But then a powerful – albeit volatile – surge caused share prices to zig zag all the way up to an all-time record close of 1170.67 on March 12. That represented a gain of more than 130% from its July 3, 2006 close, and a jump of more than 190% from its August trough.
Since that record peak, the Ho Chi Minh City’s VN-Index has continued to whipsaw investors. It sold off 23% to reach its near-term low of 905 in late April. It rebounded and climbed 23% to reach 1113.19 in late May, and then sold off about 8% to hit its Friday close of 1024.68.
The index closed down a bit more on Monday, ending the day at 994. At that level, the index is down about 15% from its record high in March.
But it also means that Vietnam stocks are up nearly 99% from this time a year ago (for up-to-date charts on the Vietnam Stock Index, check out http://www.bloomberg.com/apps/quote?ticker=VNINDEX:IND).
As jarring as the journey has been for that index, it’s been even wilder for investors in Vietnam’s other index, the Hanoi HaSTC-Index.
On March 9, Hanoi’s HASTC Index set a record 454.81 – a level higher “than even the most optimistic could have hoped for,” said Vietnam Financials. The HASTC Index bottomed out at 284.7 in June, representing a peak-to-trough decline of about 37%.
The question, of course, is where do Vietnam stock prices go from here?
Some interesting pricing paradoxes apparently emerged as the indexes made their big gains. And that’s apparently raised a lot of questions, including one that sounds suspiciously like questions the few voices of reason kept raising as U.S. Internet stocks were racing for their record highs in 2000.
According to Vietnam Financials, as Vietnam share prices kept rising late last year and into this year, some investors were asking just “why did … little-known stocks [see] their prices skyrocket, while blue chips … saw their prices remain stable or decrease?”
But with the sell-off, the market prognosticators quoted by Vietnam Financials seem to think that the market has at least stabilized at this point, contending that “both management authorities and investors have learned from the so-called ‘securities fever’.”
But the financial report also voiced a somewhat ominous note about long-delayed stock offerings. After earlier rounds of stock offerings caused a near-glut with investors, big companies apparently throttled back on their rush to issue shares. Now, however, these companies are apparently planning to proceed, and “at an inauspicious time, as the market is presently quiet,” Vietnam Financials said.
In the short run, that could whipsaw prices even more, and perhaps even force them lower. In a recently released study of Vietnam’s stock market, Hongkong Shanghai Banking Corp., part of HSBC Holdings PLC (NYSE: HBC), predicted that the Vietnam Stock Index would slip below 900 later this year http://www.thanhniennews.com/business/?catid=2&newsid=29590.
The study predicted that institutional fund managers would be pulling money out of listed shares in order to buy into some of the forthcoming IPOs planned by the largest companies.
However, some of Vietnam’s domestically based financial analysts have predicted that the VN-Index would hit a fresh record of 1,300 by the end of this year.
Which view is the correct one?
Believe it or not, the answer is this….
It doesn’t matter.
As investments go, Vietnam has a lot going for it – in the long run, that is, which is all that matters. As the market opens up, more shares are issued, and some of the remaining foreign-ownership restrictions are relaxed or dispensed with altogether, the investment opportunities for foreign investors will multiply – and quickly.
About two decades ago, Vietnam kicked the Marxist economic model to the curb, and embraced an initiative that it called “Doi Moi” – which translates roughly to “the renovation.”
In many ways, Doi Moi is akin to what China has undertaken: Vietnam has systematically added market reforms, but at the same time has kept in place government controls, and eschewed the move to a convertible currency.
One interesting result: GDP advanced at an average annual rate of about 8% from 1990 to 1997. But that quick pace of growth didn’t make Vietnam vulnerable to a financial downturn, as is usually the case, and that country was hardly nicked by the Asian Contagion market meltdown of 1997-1998. In fact, Vietnam’s growth rate slowed to an estimated 6% in 1998 and 5% in 1999. Nor were there lots of financial messes to clean up, meaning Vietnam didn’t have to undertake any of the onerous reforms some of its other emerging-markets counterparts were forced to embrace.
Indeed, even during the global recession of 2000-2002, Vietnam’s growth rate was in the range of 6% to 7% — making it the world’s second-fastest-growing country during that financially rocky juncture.
Investments that fare well during downturns – even if that only means they fell a lot less than their counterparts – are almost always merit at least a close look.
Since opening itself up to the outside world, Vietnam has attracted more than its fair share of foreign investment. And the United States has a lot to do with that. Let’s face it, as a country we were once at war with – and a war that went uncharacteristically badly for us – Vietnam has a bewitching quality for many American business leaders. That’s not a bad thing, for it’s allowing both countries to push the memories and ill will into the background. It’s helping to make life better for Vietnam’s citizenry, and is creating profit opportunities for American and Vietnamese businesses alike.
For investors always looking for the next great investment opportunity, this is definitely one market to watch.
Good Investing;
William Patalon III
(For the latest news on Vietnam, check out: http://www.thanhniennews.com/.)
