Investors often make the mistake of lumping all emerging markets together. Just like every company listed on the NYSE is different from all the others, the same goes for emerging markets. The only thing that is similar among most emerging markets is their big potential for investors as they are growing from small bases. However, there is one case where the similarities are quite striking, but with a time lag: China and Vietnam.
Since mentioning Vietnam last summer, the Market Vectors Vietnam ETF (NYSE: VNM) has begun to move in the right direction. My thesis then was that it was best to buy when everyone was selling, especially considering that the track record of the government was rather remarkable and because a lot was being done to fix the economy.
VNM is the only listed Vietnamese investment in the U.S. market. As a broad country ETF, this is a buy-and-hold investment vehicle that will take time to work out. It is already moving in the right direction and any weakness should be used to initiate positions.
Over the long haul, VNM should follow the Vietnam Stock Index (VN Index), which is still more than 50% below the highs seen in 2007. Vietnam has a very low stock market capitalization to GDP ratio, positive demographics, and the economy did not enter a recession in 2009. It does have a heavy reliance on foreign direct investment, but that is similar to China in the early years of its development.
I have no doubt that the pace of economic growth — averaging 7% per annum over the past decade — will continue and the highs from 2007 will be taken out. But this will take time and patience. If you have to make the considerations whether to hold the SPDR S&P 500 (NYSE: SPY) or the Market Vectors Vietnam ETF for the next 10 years, the choice is easy to make. The difference in performance is likely to be huge in favor of VNM due to the savings-and-investment nature of economic growth that is very different from most developed Western markets.
As a reminder, I tend to pick on the S&P 500 as it is the biggest developed market index, but other developed markets like Japan, the UK and Spain have much more serious problems and will likely produce the same disappointing results when compared to vibrant emerging markets like Vietnam.
What Are the Risks of Investing in Vietnam?
Inflation and a weak currency are the risks in Vietnam, as well as the low level of forex reserves. They stand now at $13.6 billion, down from $23.9 billion in 2008. They cover 1.8 months of prospective imports, and even Moody’s downgraded the country’s debt rating in December because of it. But, the stock market rallied after a sovereign debt downgrade. This should tell you something about the timeliness and credibility of Moody’s.
There is a competent prime minister who has made commitments to address external imbalances such as the trade deficit, a lack of liquidity in the country’s currency market and the relatively low level of foreign investment inflows. By the time he fixes all of the above, the VNM ETF will be a lot higher, so the time to act is now.