Is It Time to Flee the Vietnam ETF?

The Vietnam ETF was the second worst performer last week in the emerging market pack behind only the VelocityShares Russia Select DR ETF (RUDR). This was in sharp contrast to its extremely impressive performance in the first-two-and half months of the year when the fund tacked on more than 17%. Sluggish growth was seen in the first quarter as the government was unsuccessful in stoking more lending to businesses thanks in part to banks’ rising bad debt.

Slowing GDP Growth: The nation’s GDP grew 4.96% in Q1, falling short of 6.04% growth registered in 4Q13 and analysts’ estimate of 5.2%. Government cut its key policy rate in March to bolster growth to the target of 5.8% while the World Bank expects the nation to grow 5.4% this year and the Asian Development Bank expects growth of 5.6%. Weak household consumption thanks to low job growth as the manufacturing sector is operating at sub-par level has hit the growth outlook.

Struggling Banking Sector: Another main concern in Vietnam is the bad debt woes in the all-important banking sector. Presently, the nation boasts the highest level of bad debt among Southeast Asia’s largest economies which put a lid on its lending, thus hurting corporates. As a result, the government appears steadfast in creating a more positive environment for foreign investment inflows which includes a plan to auction bad-debt assets of banks.

Moderating but Still High Inflation: Like many other emerging nations suffering from the dual crisis of sluggish growth and rising inflation, Vietnam is also putting up with inflationary pressure, though not too high.
Last March, the nation logged an inflation rate of 4.39%, a high measure, but in many ways, a great achievement as the nation had inflation rate at double digits two years back (read: Is The Vietnam ETF Back On Track?).

For this year, HSBC projects an inflation forecast of 6.5% (though tapered from 7.3%). Subdued domestic demand has probably kept inflation under control for otherwise it might spring back to the high single-digit level.

Time for an Escape?

While the aforementioned issues stir up concerns around the nations, investors should also note that the outlook for this frontier or small emerging market is still brighter among the big EM bunch. The splendid run in this product in the start of the year basically made the product little overvalued against the biggest and diversified emerging market ETF, the Vanguard Emerging Markets Stock Index ETF (VWO).

VWO’s trailing 12 month P/E stands at 11 times while the P/E of pure play in on Vietnam – Market Vectors Vietnam ETF (VNM) – is at 14 even after the sharp retreat in the recent past (read: How Frontier Market ETFs Surged as EMs Plunged).

If we look past the valuation and dig into the nation itself, we will get better vibes out of it. While the nation’s domestic demand remains soft, slow-but-steady growth in its key export markets (one of which is the U.S. itself) should propel growth ahead. Exports grew 14% in Q1 while imports saw an uptick of 12%.

Disbursed foreign investment also rose 5.6% year over year, as per Bloomberg. Also, with the migration of low-wage manufacturing hub from China to Vietnam, the latter could surface as an outsourcing center going forward (read: 3 Emerging Market ETFs Off to a Great Start in 2014 ).

Fitch Ratings in January upgraded its outlook on the nation from stable to positive citing its slow-but-steady recovery trail. One of the worries of the nation – inflation – also saw a steep decline in two years. Its listless 1Q14 GDP growth was also a 2-year high Q1 figure.

Thus, all Vietnam needs to do is to deal with its high non-performing loan situation in the banking sector. If this can happen, investors might want to look to the Vietnam ETF for exposure.

While the product is risky now, it is certainly capable of producing huge gains. So, investors with meager exposure in emerging markets will find the below-mentioned Van Eck fund useful in deciding whether Vietnam warrants a spot in your portfolio, at least for the near term.

VNM in Detail

VNM looks to track the Market Vectors Vietnam Index, which provides exposure to the publicly listed companies that are domiciled and listed in Vietnam, or derive at least 50% of their revenues from the country. Notably, Vietnam accounts for about 70% of the fund followed by Thailand (8.7%) and the U.K. (7.9%) (read: Emerging Market ETFs See Inflows: 3 ETFs to Pick).

The ETF currently holds $488.1 million in AUM and charges 76 basis points to investors annually for expenses. The fund holds 28 securities with about 57% of holdings invested in top-10 companies. In terms of sector exposure, financials occupy the top spot with about 33.2% weight. Energy (23.2%) and industrials (14.4%) round out the top three positions.

Since one-third of the basket is attributed to financials, the fund remains a risky bet as of now due to the poor health of the country’s banking system. The fund’s focus is mainly on large cap securities and offers a nice blend of growth, value and blend style.

VNM currently has a Zacks ETF Rank of 3 or Hold rating with a medium risk outlook.

Bottom Line

In short, though the nation displayed some signs of slowdown in the latest quarter hurt mainly by a troubled banking system, other indicators of recovery seem to be in place despite the broader emerging market lull on QE wrap up.

So, VNM could be a good pick especially on its latest dip. Since the banking system remains the country’s backbone, any trouble there may put the nation’s ETF at risk. So, investors intending to play the nation through VNM should have a strong stomach for risks, though there is definitely some promise in this product going forward.

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