ANALYSIS-Capital wave misses Vietnam, but is it time for a look?

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Friday October 29, 2010 11:11:04 AM GMT

* Stock market among the worst performing in Asia

* Low valuations expected to spark upturn

* Macroeconomic risks remain; currency a concern

By John Ruwitch

HANOI, Oct 28 (Reuters) - Most economic policymakers in emerging Asia are fretting over how best to staunch surging investment inflows. But Vietnam's don't have to worry.

A wave of foreign cash that has pumped up stock markets and currencies across the region and sparked warnings about the dangers of hot money has bypassed Vietnam, a favourite of emerging market investors a few years ago.

Analysts say a mix of macroeconomic uncertainty, government policies that have checked liquidity, poor corporate governance and bad memories of recent problems have kept portfolio investors at arms length this past year.

Some say the tide will have to turn for Vietnam because valuations will soon be too attractive to ignore.

But the cons look set to keep it off the radar of all but the bravest investors for some time to come, limiting development of the capital markets and overall economy, and choking foreign flows that could help fund a structural trade deficit.

The benchmark Vietnam Index has shed 25 percent over the past 12 months, and the smaller Hanoi index shed a similar amount. By contrast Sri Lanka's main index has shot up 116 percent, Manila's is up 43 percent, Jakarta's has risen 41 percent and Bangkok's is up 35 percent.

Trading volumes are near record lows.

"You could think there's some virtue to not getting too much hot money because that money does come in fast and go very rapidly," said Deepak Mishra, lead economist in Vietnam for the World Bank, which sounded an alarm last week about the downside of all the capital sloshing around East Asia.

"But I think in this case Vietnam would like some more money. While other countries are saying, hey guys we have enough, Vietnam is saying, how about us?"

Vietnam's nascent markets have performed like a yo-yo in the past few years. In 2006, with the country on the brink of World Trade Organisation membership, the benchmark index was a top global performer, soaring 144 percent.

Euphoria led to overheating, though, and then the global recession hit. Investors pulled out, and in 2008 Vietnam's stock market dropped 66 percent and was one of the world's worst.


Last year, the Vietnam Index rose in tandem with global economic prospects before decoupling in October. Investors blamed macroeconomic uncertainties.

Vietnam funds have suffered, too. From the end of last year to early October, 17 of the 20 worst performing frontier market funds were Vietnam focused, according to Lipper data.

Discounts have widened. Last September, Indochina Capital liquidated a London-listed fund launched in 2007 that was trading 50 percent below its NAV.

But this August, London-based Numis Securities Ltd published a 115-page sales pitch that argued it was time to take another look based on Vietnam's strong fundamentals and bright prospects.

Many local funds, too, say Vietnam is due for a rebound. International analysts tend to be much more cautious.

Don Lam, chief executive and co-founder of asset management company Vinacapital, said now was an "excellent investment window" because of the low valuations, a relatively stable macroeconomy after the turbulence of 2007-9 and strong corporate earnings growth averaging around 15 percent.

Vietnam's trailing PE is among the lowest in the region at 11.2, based on data about companies tracked by Starmine. Thailand's is 17.2 while Indonesia's is 23.1.

Price-to-book was lower in Vietnam than the average in Asia ex-Japan at 2.1 -- well below those of Thailand, the Philippines, China and Indonesia, the data showed.

Chris Freund, founder of Mekong Capital, a Vietnam-focused private equity firm, says there is a clear cycle and it appears to be about to turn.

"I've seen this pattern so many times now. In markets like this, capital comes in waves," he said.

"Definitely we're in a phase right now where capital's just trickling in very, very slowly, but it's just a matter of time for a new wave of capital to come in. Eventually the earnings growth will speak for itself. I don't see signs of a major shift yet, but it's hard to imagine that this could last much longer."

ALMIGHTY RALLY COMING? A domestic-investor-led stock market rally could help kickstart foreign investment, but some don't see that happening until the ruling Communist Party completes a leadership reshuffle expected early next year.

More immediately, a new central bank regulation, entitled Circular 13, imposing a higher capital adequacy ratio on banks and forcing enhanced risk management has dampened domestic sentiment as banks scramble for capital, brokers say, although it is expected to strengthen the sector over time.

Stubbornly high interest rates have prompted other companies to look to the capital market to raise cash, too.

Meanwhile, shaken by the near bankruptcy this summer of Vinashin, a huge state shipbuilding conglomerate, the authorities say they are bolstering efforts to reform state-owned enterprises and make them more efficient, which analysts say is positive.

"With valuations at very low levels, and SOE and banking reforms well under way, there are the makings of an almighty rally when capital-raisings are over," Dragon Capital, another Vietnam fund management company, said in a recent note.

"But this may be a 2011 story."

Even then, foreign investors may not return in force.

A cycle of currency devaluations that has lasted almost three years does not appear to have ended. The "equitisation" process of privatising and listing chunks of state-owned enterprises has stalled, preventing a serious liquidity build-out. Foreign access to Vietnamese companies remains restricted and red tape abounds.

"There has to be a realisation in the government of how capital markets run," said Franklin Templeton's emerging market guru Mark Mobius. "They've got to just free up the market. They've got to allow more free flows of funds... They've got to take a leaf out of the page of China, of Malaysia, Singapore."

Jacqueline Tse, Global Research Equity Strategist for HSBC in Hong Kong , said the government was clearly taking some steps in the right direction.

"But it's not enough in my view," she said. "Basically, they just need to get the ball rolling. Once they do enough things right there will be more people buying their stock and things will turn better. But they need to hit that point." (Editing by Andrew Marshall)

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