Low inflation Vietnam a good alternative to China

Investors hoping to get out of China and into a low-inflation market need only look next door to neighbouring Vietnam where inflation has remained below analyst forecasts at around 3%, says Andy Ho, manager of the VinaCapital Vietnam Opportunity.

Investors hoping to get out of China and into a low-inflation market need only look next door to neighbouring Vietnam, where inflation remains below analyst forecasts at around 3%.

Lockdowns have reduced China’s demand for Vietnam’s main export to the country, food products, which has tamed inflation, despite soaring oil and gas prices, says Andy Ho, manager of the VinaCapital Vietnam Opportunity (VOF ).

The £780m single country investment trust focuses on Vietnam’s domestic sectors that are well-placed to capture rising wealth and consumption as the country sets its sights on becoming a bona fide emerging market in the next five years.

However, China’s position as a global manufacturer has also meant Vietnam has been caught up in supply chain issues owing to its 15% gross domestic product (GDP) trade deficit to the country. 

‘A lot of components that Vietnam produces to export to the US and Europe do come from China. With China’s slowdown, there’s a conservative inventory of these components that will be depleted in the coming weeks and months if China continues its lockdown,’ Ho (pictured below) said.

The US and EU make up 41% of Vietnam’s exports, said Ho, which represents a major risk to its economy, where gross domestic product growth of 6.5% has been forecast in 2022, the second highest among Association of Southeast Asian Nations (ASEAN) member states after Singapore. 

The trust combines investing in listed and unlisted companies, with roughly two thirds of assets classed as conventional public equities, according to the March factsheets.

Real estate is the largest sector in the fund, making up 25.8% of assets, while the team flagged Vietnam’s infrastructure spending is set to surge about 40% over the next five years. Top five property company holdings include Khang Dien House and Vinhome.

Materials and financials hold have % and 20.1% weightings respectively, with the largest positions including Asia Commercial Bank and Phuoc Hua Rubber.

Ho acknowledged the liquidity issues which hard-to-trade private holdings could cause, explaining how the team mitigates the risks.

‘All our investments have put options, the ability to sell our shares back to the sponsor, or the company, at a formidable [return],’ he said

The manager noted that put options – which guarantee the right to sell at a certain price – are negotiated with the sponsor or largest shareholders rather than the company.

The 2%-yielding trust’s underlying portfolio has generated a -4.4% return year to date, according to Numis, above the benchmark Vietnam Stock Index’s return of -10.5% and top among peers.

The shares have lagged slightly with returns of -6.5%, but are now trading at a 20.6% discount to net asset value, offering investors an apparently cheap ‘entry point’ into a fast-growing economy.

The board has spent over £280m since 2011 on share buybacks, Ho said, in an effort to reduce the closed-end fund’s persistent discount, which has averaged 18.9% over the last 12 months. 

Longer term returns are also well above the benchmark. Over the last three years, the portfolio has made investment returns of 58.5%, more than 20% ahead of the Vietnam Stock Index. 

Ho highlighted that Vietnam has already qualified to enter the emerging markets index on most measures, but there are a few ‘soft factors’ still keeping it classed as a ‘frontier market’ by MSCI. 

‘Financial statements must be written fully in English, trading liquidity of some of the larger companies should not be limited and foreign ownership limits must be lifted completely – a lot of companies choose to cap it at 49%,’ he said.  

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