THE FUND
The Fund rose 7.8% (SEK) in 2019 compared to the benchmark which rose 12% (SEK). A majority of the negative attributions came from the Real Estate sector where the Fund maintained significant underweight, especially in VinGroup stocks which represent more than 1/3rd of the benchmark index. Due to multiple corporate actions and capital raising from foreign institutions kept VinGroup valuations unreasonably high. We opine that the Real Estate sector is highly dependent on bank financing and Chinese FDI (for now) and carries some risk as banks are gradually clamping on real estate related financing. In addition, the government is also investigating misappropriations by the real estate developers in acquiring land from government organizations. Hence, we are likely to remain selective in our Real Estate picks in 2020. The Fund had indirect exposure to the construction sector through Materials, which performed better in terms of relative performance. Our off benchmark bet in Information Technology, FPT Corporation, added alpha during the year. FPT posted double-digit growth in revenue and profitability, driven by software division. In addition, the approval to launch selected FOL stocks provided the much-awaited trigger to the stock. With the new FOL stocks ETF, likely to be launched in the 1st quarter 2020 will provide an opportunity to foreign investors to access low valuation FOL stocks, which are otherwise inaccessible or trade at a significant premium.
We believe Vietnam will continue to post high economic growth in the coming years, backed by industrialization, exports growth, and FDI. This will improve income levels, widen middle-class society and promote consumerism. Going into 2020, the Fund will be targeting value and structural growth stories falling in the theme.
MARKET
The Vietnam market posted gains of 12% (SEK) in 2019, significantly underperforming the Emerging markets where MSCI Emerging Markets gained 24% (SEK) and slightly below the MSCI Frontier Markets xGCC, which rose 13% (SEK). Oscillating trade tensions between the US and China kept domestic and foreign investors cautious towards Vietnam, despite better economic growth and market reforms during the year. In 2019, liquidity dropped significantly to USD 137m in average daily traded value compared to USD 217m in 2018. Foreign portfolio investments also slowed down to USD 230m compared to USD 1.8bn in 2018.
Vietnam’s GDP grew by 7.02% in 2019, depicting resilience to the external shocks and noise of trade war. Total trade stood at a record high of USD 517bn, represented by exports of USD 263.5bn and imports of 253.5bn, with a trade surplus posting an all-time high of ~USD 10bn in a year. This translated into foreign currency reserves of USD 79bn, where USD 20bn were net added in 2019. The Vietnamese Dong, hence, remained one of the strongest currencies in 2019 where many currencies lost value. Inflation modestly increased by 2.73% Y/Y, well below the government’s target of 4%. Committed and disbursed FDI in 2019 reached another all-time-high of USD 38bn and USD 20.4bn respectively.
In FTSE’s annual country classification review, Vietnam retained its Frontier Market status but was added to the watch list of ‘Secondary Emerging Markets’ for its next annual review in 2020. Despite many reforms undertaken by Vietnam in previous years to get upgraded, it failed to resolve the clearing and settlement criteria to make it to Emerging Market status, however, it surely is closer to the finish line.
The State Securities Commission (SSC) officially approved the new local Exchange Traded Funds (ETFs), tracking the newly created indices, Vietnam Leading Financial Index- VNFin Lead and Vietnam Diamond Index – VN Diamond. These new ETFs would allow foreign investors to access the financial sector or selected basket of foreign room full stocks which were inaccessible previously or carried a high premium.
The State bank of Vietnam proactively kept a check on credit growth in selected sectors and weak banks, especially in an already heated economy. As Vietnam embraces Basel II regulations, the State Bank of Vietnam issued new directives for non-compliant banks such as 1) Reducing the ratio of short-term loans used to finance longer tenure loans to 30% from 40% and 2) Increasing the risk factor of real estate consumer loans to 150% when calculating Capital Adequacy Ratio (CAR). Credit growth hence hit a 5-year low of 12.1%. The State Bank of Vietnam announced to cut its policy rates (refinancing rate and rediscount rate) by 25 bps, effective September 16, 2019.
The European Council and Vietnam officially signed the European Union – Vietnam Free Trade Agreement (EVFTA) and the EU – Vietnam Investment Protection Agreement (EVIPA) in 2019. After the implementation of the agreements, 99% of import tariffs will be eliminated, in which 65% will be removed immediately, and the rest will be gradually brought down to zero within 10 years. This will offer a great opportunity for Vietnamese goods to penetrate the EU markets. Vietnam exported USD 42.5bn worth of goods to EU countries while imported USD 13.8bn from the region in 2018. Besides offering significant economic opportunities, the trade agreement also offers knowledge-sharing and provides an opportunity to enhance its labor conditions, safety, environmental issues, and consumer protection.
Taking a cue from the available nine months results, most of the corporate results were better than expected, especially the Banking and Real Estate sector. A majority of the big banks posted high double-digit growth in earnings owing to higher credit growth and an increase in non-interest income. The State bank of Vietnam enhanced the credit quota for the banks which complied with the Basel II regulations. An increase in the overall trade & investments boded well for the non-interest income. Resumption of development activities in Ho Chi Minh City, after removing regulatory bottlenecks, resulted in better performance for the real estate sector. VinGroup (leading real estate developer in Vietnam) had an average earnings growth of more than 50%, contributed by its real estate subsidiaries.
DISCLAIMER:
Capital invested in a fund may either increase or decrease in value and it is not certain that you be able to recover all of your investment. Historical return is no guarantee of future return. The state of the origin of the Fund is Sweden. This document may only be distributed in or from Switzerland to qualified investors within the meaning of Art. 10 Para. 3,3bis and 3ter CISA. The representative in Switzerland is OpenFunds Investment Services AG, Seefeldstrasse 35, 8008 Zurich, whilst the Paying Agent is Società Bancaria Ticinese SA, Piazza Collegiata 3, 6501 Bellinzona, Switzerland. The Basic documents of the fund as well as the annual report may be obtained free of charge at the registered office of the Swiss Representative.
