Angel Investors and Travelers: Vietnam

Add a Comment

Name:


Email:


Comments:


Submit the word you see below:



Notify me of follow-up comments?

Angel Investors and Travelers: Vietnam

Monday, August 28, 2006

Because of its thinly traded market and lack of investment options, Vietnam is often overlooked by global investors. Not Merrill Lynch...or Exquisite Safaris private, luxury, philanthropic travelers.

The giant financial services company has acquired a coveted "trading code" needed to buy and sell shares directly on Vietnam's small but growing stock market. Merrill obtained the right to directly hold Vietnamese shares last week, six months after Spencer White, the bank's chief regional strategist, called Vietnamese stocks a "ten-year buy."

Vietnam is slightly larger than New Mexico in size, but it has a population of 85 million people, half of whom are younger than 25. Vietnam's economic growth rate of 8% is close to that of China, and its manufacturing capability has a long way to go; manufacturing currently represents just 11% of Vietnam's gross domestic product. Wage rates are lower than in neighboring countries, and the service side of the economy is thriving.

I am no fan of the Communist Party of Vietnam, but market liberalization and reform is sporadically moving ahead. The country is also gradually becoming integrated into the global economy. On May 31, 2006 Vietnam signed a bilateral agreement with the U.S. to gain entry into the World Trade Organization by the end of the year. This was followed by the U.S. Senate's decision to award Permanent Normal Trading Relations status to Vietnam on July 31, 2006 11 years after diplomatic ties between the two nations were re-established.

Vietnam's recent growth has been driven primarily by exports, which were up 26% during the first half of this year. Leading the charge are textile and garment manufacturing, oil and mining, agriculture and food processing.

Vietnam has a tiny but growing stock market. With only 47 listed companies and one domestic fund, the Vietnam Stock Exchange has a current market capitalization of roughly $3 billion. In early 2005, it had a market cap of only $200 million. There were 12 initial public offerings in the first half of this year, but incredibly, two companies still account for half of the market's capitalization.

This thin market is volatile, and after rising almost 70% in the first part of the year, it has lost about 30% of its value during the past 12 weeks. Such volatility is not for the faint of heart. Foreign ownership of listed securities is permitted, but it is capped at 49% for most companies and only 30% for banks.

Still, for long-term, far-sighted investors, the attractions are clear: a young and literate workforce that is consumer-oriented, a very underdeveloped banking system that is on the cusp of major change, rising foreign direct investment, cost advantages in growing its manufacturing sector, and strong export growth. There is also huge upside potential in Vietnam as a tourist destination.

Valuations are also attractive. According to Merrill Lynch, price-earnings multiples are between eight and 10 times earnings, and earnings per share are growing at a breakneck 20% to 40% annual clip. Dividend yields range from 3% to 10%.

There is always the risk that reform efforts will falter and that corruption and bureaucratic red tape will continue to challenge even the most persistent and committed company entering the Vietnam market. The country's bureaucracy is as labyrinthine as ever, and it has an opaque legal system with separate laws for foreign and domestic investors.

There are only a few direct plays for investors. One is the Vietnam Opportunity Fund (VOF) listed on the London Stock Exchange. Its U.S. pink sheet listing, VTOPF, trades at $2.42, down from a high of $2.62 earlier this year. Another option is the Dublin-listed Vietnam Growth Fund.

Another option for investors is a neighboring country with a somewhat lower risk profile, similar growth potential and a more developed market: Indonesia. It is the world's third-largest democracy, which is a big advantage over Vietnam's Communist government.

The Indonesia Fund is a closed-end fund that is currently in Chartwell's Asian Opportunity portfolio. It is up 28% over the past year, and its annualized total return over the past three years through July is an eye-catching 40.4%. You can build a small position at the current price of $8.48, since the premium to the fund's net asset value is only 3.8%, substantially below the norm.

Treat any portfolio allocation to Vietnam or Indonesia as if you were investing in an emerging-market venture capital fund. It is a speculative position and will take time to develop. In my book, the potential payoff makes it worth the risk.

Carl Delfeld is head of the global advisory firm Chartwell Partners and editor of Chartwell Advisor. He served as a director on the executive board of the Asian Development Bank during the administration of President George H. W. Bush, and he is the author of The New Global Investor.

Published in Forbes written by Carl Delfeld, Chartwell Advisor


Vietnam Links:
Philanthropic Travel Vietnam
Halong Bay World Heritage Site
Old Quarter Hanoi
Investing in Vietnam

Related Links:
My First Philanthropic Travel Experience
Teaching your Children Philanthropy
Understanding Philanthropic Travel
Why Exquisite Safaris?