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Underpinning performance

Released at: 08:27, 20/03/2014

Underpinning performance

2013 was an acceptable year for the stock market and solid macro-economic conditions would result in a healthy 2014. Mac Quang Huy, CEO of Maritime Bank Securities (MBS)

by Mac Quang Huy, CEO, MSBS

The Year of the Snake, 2013, has come to an end with Vietnam continuing to struggle with a wide range of challenges. The economic crisis that began a few years ago is not over yet. Despite impressive figures, macro-economic factors bring little hope for the future.

2013 closed with inflation at around 6 per cent; its lowest level for ten years. The trade surplus stood at $900 million, a similar result to 2012. On the surface these appear to be good figures but there is actually some cause for concern. Weak national demand lies behind the low figures, triggering production stagnation. Credit growth was around 11 per cent versus the 12 per cent target, but disbursements mainly came at the very end of the year while there is a surplus in bank liquidity. These reflect a slowdown in domestic production and the unhealthy state of the economy.

Foreign direct investment (FDI) was probably the brightest spot in Vietnam’s macro picture last year. As at November, registered and disbursed FDI stood at $22 billion and $12 billion, respectively, for an increase of 54 per cent and 10 per cent year-on-year. Off-shore cash flows may become a leading factor in restoring Vietnam’s economy in the time to come. The Vietnam Dong (VND) was devaluated by 1 per cent in June after two years of being kept stable. Further devaluation will probably take place in 2014 as the government seeks new global cash inflows.

Following the well-known Vinashin case three years ago, the two large corruption scandals at Vinalines, the State-owned shipping and port corporation, and Agribank Leasing Company II (ALCII), a 100 per cent owned subsidiary of the country’s largest State-owned bank, have worsened the macro picture and affected public confidence. The cases were brought to the public’s attention in December, with the four death penalties handed out by the court somewhat easing the political tension. On the one hand, credit should be given for the quick action and rather harsh measures taken by the government in these two cases, but the public belief is that these are only the tip of the iceberg. It has become clear that Vietnam’s SOEs have become a major burden on the economy and very few operate effectively despite their huge advantages and resources compared with private enterprises.

It should be noted that the government is already aware of the many problems at SOEs and has introduced a number of measures to improve their corporate governance and management efficiency. These measures include boosting the equitisation and restructuring process and requiring SOEs divest from their non-core businesses to focus on what they can do best. These measures are certainly the right steps to take but will need to be sped up to have any meaningful impact.

A number of international organisations believe that Vietnam’s economy stands a good chance of recovering and will be slightly better this year, but GDP growth will remain below 6 per cent.

Equity market: Year of the blue-chip

The stock market was boosted significantly in 2013, despite the macro-economic deterioration, as “giant” stocks returned. The VN-Index punctured the 500-point mark at year’s-end, climbing by around 21 per cent year-to-date and on the way back to its 2007 record peak. Market capitalisation rose from VND765,000 billion ($36 billion) to VND964,000 billion ($46 billion) by year’s end, accounting for around 31 per cent of GDP, mainly due to rises in blue-chip stocks, which made up the bulk of total market value.

After three years of being forgotten, blue-chip stocks regained momentum in 2013, leading to the rise of the stock market. While the macro-economy remains unfavourable there has already been a marked improvement in investor confidence and cash flows to the market as investors believe that the worst is already behind us and the economy will gradually pick up. Towards the end of the year the market saw several booming sessions as liquidity improved significantly. On November 21 a record 173 million shares changed hands. Average trading value stood at VND1,322 billion ($65 million) per session; a slight improvement year-on-year.

As an emerging market, Vietnam has seen participation by exchange traded funds (ETFs), including FTSE Vietnam Index Series, Vaneck Global-Market Vectors Vietnam (VNM), and iShare MSCI Frontier 100. Although the portfolio allocation to Vietnam of these funds remains modest, ETFs have become a new and interesting player in the local stock market. Local investors now look to guess the rebalancing act by ETFs at the end of each quarter to take advantage of the market’s thin liquidity through various speculation activities. This added a new taste and helped improved general liquidity. As indexes have edged up over the year, Vietnam ETFs can report the best performances in the Asia Pacific region in 2013. The EMAS-Index of Malaysia and LSX-Composite-Index of Laos reported gains of 13 per cent and 2 per cent, respectively, while all other regional indexes reported losses of up to 15 per cent.

As for the primary market, stock issuance is unfortunately not considered a good way to raise funds due to the generally low stock valuation, while bond issuance is considered a better solution in a low-rate environment. Most of the stock issuances are technical measures to raise funds from existing investors by way of bonus shares and/or rights issues. In the first six months only VND2,344 billion ($111 million) were raised, for a decline of 58 per cent year-on-year.

Amid generally conservative sentiment, very few new stocks have been listed while 37 have chosen to leave the bourse as a result of disqualification (20) or because of major shareholder intentions (17), who do not want to see their stock prices falling. This new record number of companies leaving the bourse for whatever reason only confirms the sluggish economy. The market expects to welcome a blue-chip from one of the largest banks in Vietnam in the new year. The stock of the Bank for Investment and Development of Vietnam (BIDV) is in its final stage of registering for central custody and listing on the Ho Chi Minh Stock Exchange (HSX).

Fixed income market: A better way to raise funds

As interest rates eked out a downward trend in 2013, many local businesses have chosen bond issuance as an alternative way of raising funds. In the first ten months an estimated VND30,000 billion ($1.5 billion) in corporate bonds were successfully issued in the primary market, but most of these were privately placed as the public market for corporate bond remains very limited. It is expected that corporate bond issuance will continue to rise in the first six months of 2014 as the interest rate will remain low while bank liquidity is in surplus.

In view of the budget deficit and the obligation to repay maturing debt, the government has taken the opportunity to issue government bonds (VGB). In 2013 an estimated VND177,000 billion ($8.5 billion) in VGB and VND35,000 billion ($1.7 billion) in government bills were raised. In the meantime, the Vietnam Development Bank (VDB) and the Vietnam Bank for Social Policies (VBSP) have also issued VND44,000 billion ($2 billion) in government-backed bonds.

According to the Asian Development Bank (ADB), the country’s bond market went up by approximately 19 per cent year-to-date, reaching $25 billion and recording the best performance in the third quarter of Asian bond markets. However, the VGB issuance was significant while the corporate bond was modest. In fact, the VGB market size hit $24 billion, rising 25 per cent year-on-year, while the corporate bond market plunged sharply, by 54 per cent year-on-year. Trading of VGB was better-than-expected, with an average trading value of VND1,257 billion per session, jumping 90 per cent year-on-year. Unfortunately, corporate bond trading on the secondary market is still almost non-existent.

Good news came towards the end of the year from the successful issuance of $200 million Vingroup JSC (HSX:VIC) bonds on the Singapore Stock Exchange (SGX-ST). This success comes amid the difficulties in the real estate market - the core business of Vingroup - and the impaired reputation of the Vietnamese Government among international investors due to the economic slowdown and economic scandals.

The Vietnam five-year Credit Default Swap (CDS), a price to insure the default of debt, has gradually edged higher than that of its Southeast Asian peers, trading in the range of 200 bps - 250 bps. This has hurt the government’s plan to issue international bonds and limited the choice for Vietnam to raise funds for the country’s development.

M&A activity: Sharp decline

M&A activity declined significantly in 2013, estimated at around $3 billion compared with the record $5.1 billion in 2012, mainly relating to inbound deals. There were no mega deals reported in 2013. Japanese buyers continued to keep their leading position, completing some 19 deals worth $600 million. Dutch, South Korean, US and Thai investors complete the top five international investors list. Food and beverages (KKR - Masan Consumer), construction and materials (Thailand SCG - Prime Group), and real estate (Warburg Pincus - Vincom Retail) were highlights of the top deals.

SOE equitisation: Gear-up for a good re-start

After a high level of activity during 2005-2007 the equitisation of large SOEs has become moribund, with very few IPOs being seen. It was reported that only 90 SOEs or less were successfully equitised during the 2010-2012 period. The good news, however, is that the government has decided to re-invigorate the process in order to improve SOEs, and now could be the right time. In early 2013 the Prime Minister issued various decisions to approve the restructuring plans of a number of large SOEs under his direct control, which included detailed plans and deadlines to divest from non-core subsidiaries and equitise the SOEs. It remains to be seen how these plans play out, as continued, major delays have been witnessed in the past.

In 2013 many State-owned corporations under the Ministries of Transport, Construction, and Agriculture and Rural Development actively began the process, although only a few were completed by the end of the year. It is expected that the market will see some large deals in the years to come, including Vietnam Airlines, MobiFone, and Vinaphone, among others. These mega deals, if realised in time, could create significant momentum and improve the size of the capital market substantially.

TPP: A “buzz word”

The Trans-Pacific Partnership (TPP) became a “buzz word’ in the local media during last year. Basically, this is a free trade agreement among multiple parties in the Trans-Pacific region, accounting for around 40 per cent of total global trade turnover. Local economists and stock market strategists expect the TPP may boost the stock market, similar to the impact of WTO admission in 2006. Garment and footwear industries may gain huge advantages from the TPP thanks to tariff cuts, enforcing its exports to other TPP members. It is expected that TPP negotiations will be completed this year.

Policy development: A busy year for policy makers

2013 was a busy year for policy makers, who had to work harder in order to launch new rules to reform the stock market. One of the most sought-after regulations is the lifting of foreign ownership limits in listed companies. After much debate and effort, the State Securities Commission (SSC), the country’s financial watchdog, recently completed a draft circular raising the room for offshore investors from the current level of 49 per cent to 60 per cent of a company’s registered shares. The rule is, however, pending the Prime Minister’s final decision.

In November the government issued Decree No 108/2013 providing sanction rules on administrative violations in the stock market, replacing Decree No 85/2010. The new Decree provides tighter regulations and much tougher penalties for violations in the expectation that the stock market will become more transparent and investors will be better protected.

A few technical measures were also implemented during 2013. In the beginning of the year the SSC allowed HSX and HNX to widen their daily trading band from +/-5 per cent to +/-7 per cent and from +/-7 per cent to +/-10 per cent, respectively. At the same time margin loans were also relaxed, in that securities can finance up to 50 per cent of an investor’s trading portfolio from the previous limit of 40 per cent. The Vietnam Securities Depository (VSD) also reduced depository fees by 20 per cent in order to support investors.

In July, HSX and HNX extended their daily trading session to 3pm in an effort to improve market liquidity. HNX also introduced a series of new orders such as At the Close (ATC) and Market to Limit (MTL), in order to the trading orders.

In review: Hope for a better-than-expected year

2013 was a difficult year but certainly not a bad year for stock investors. As the VN-Index increased by 21 per cent, many smart investors had good trading results to celebrate the new year. Market trading strategists at Maritime Bank Securities (MSBS) agreed that the stock market will continue to improve in 2014 but it will certainly depend on macro-economic and policy development. The VN-Index is likely to accelerate, conquering the 530-point and 550-point marks. Energy, financial services, rubber, and consumer goods stocks are expected to be good destinations for investment.

In view of the government’s strict control of the gold and foreign exchange markets, which are meant to be kept stable, the stock market will benefit and could probably become one of very few sound investment venues for financial investors in the years to come. As the macro-economy is likely to get better in 2014, as the government is trying to take measures to improve the situation, Vietnam could, once again, become an attractive destination for offshore investors, especially for longer-term fund flows. Curbing inflation and public debt, re-accelerating the equitisation process of large SOEs and using capital more efficiently are the right things to do and these may make 2014 a better-than-expected year for all.

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