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ETF News And Commentary

After a dismal performance in 2011, Vietnam ETF had started 2012 on a very strong note and was the one of the best performers among all country ETFs during the first quarter of 2012.

The ETF suffered later in the year as a result of a serious of negative news related to its banking system. But with some reform measures announced by the government, the ETF bounced back strongly later in the year, with a 27% return over the last three months.

Notwithstanding short-term volatility, the country seems to be an excellent long-term investment. (Read: 4 Best ETF Strategies for 2013)

Political and economic reforms (Doi Moi)) launched in 1986 transformed Vietnam from one of the poorest countries in the world, with per capita income below US$100, to a lower middle-income country with per capita income of about US$1300 in 2011. Poverty ratio has fallen from 58% in 1993 to about 14% in 2010.  

Vietnam’s GDP increased by more than 8% annually from 2003 to 2007, before the global recession hit the export oriented economy. Per IMF estimates, the economy slowed down to 5.1% in 2012 from 5.9% in 2011 but will rebound in 2013 to 5.9%.

Foreign investors have poured a lot of money into the country as a result of strong growth and positive reforms. (Read: Best Latin America ETFs for 2013--part I and II)

Positive demographics further support the future growth prospects. The population is about 90 million with a median age of about 28 years. Most of the young people are well educated and can speak English. Unemployment rate at ~2% is among the lowest in the world.

According to a study by Ernst & Young, Vietnam is expected to grow by almost 6% over the next 25 years and per capital income is expected to grow by more than six times over the same period.

Vietnam continues to be the main beneficiary of the migration of low-end manufacturing out of China as the producers try to take advantage of wages that are about half of that in China. The shift in China’s policy to focus more on domestic consumption will also benefit Vietnam as an outsourcing center.

We may add that Vietnam now faces strong competition from neighbors like Bangladesh, Myanmar and Cambodia in low-cost manufacturing. However in recent years the country has been somewhat successful in moving up the value chain by starting manufacture of higher-value products, in addition to its traditional export items of clothing and footwear.

Economy still suffers from some structural problems like inefficient and wasteful public enterprises (which account for about 40% of output), undercapitalized banking sector and high trade deficit. (Read: Focus on Earnings with these ETFs)

2011 was a bad year for the economy as the growth slowed, inflation spiked (touched 23% in August 2011), and trade deficit worsened. As a result, the government passed a resolution to restrain credit growth and control inflation and the central bank raised rates several times.

The economic activity suffered due the aggressive rate hikes and the banks were saddled with bad loans. Later that year, the Government announced a three pillar economic reform program aimed at restructuring public and state-owned enterprises and the financial sector, as the top priorities for the next five years.

Last year, the government approved and published a broad plan for banking sector reform. The plan included merger of weak banks and recapitalization of the banking system. The government also plans to set up an asset management company to take over the bad debts from the banking system.

Arrest of a prominent banking tycoon in August last year had rattled the stock market and the banking system but it also sent signals to the foreign investors that the authorities were willing to make serious efforts to tackle the problem of corruption and mismanagement in banks and state owned enterprises.

Recently the authorities announced some more measures to attract foreign investors--like allowing them to own more than 49% stake in some companies.

With the inflation under control, the central bank now has more flexibility to lower rates in order to support growth. As expected by the market, the bank announced a 100 basis points cut in the key rates last month (sixth rate cut of the year).

With an improving trade balance the country may actually post a current account surplus in 2012 (per World Bank) after years of persistent current account deficit.

Market Vectors Vietnam ETF (VNM - ETF report)

VNM tracks 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 Vietnam.

The fund currently holds $324 million in AUM and charges 76 basis points to the investors annually for expenses.

VNM holds 32 securities, with an average weighted market cap of $3.4 billion. The focus is on mid-cap (42%) and small-cap (49%) stocks while large-caps make up just 9% of the total assets. In terms of sector exposure, financials occupy the top spot with 43% weight. Energy (23%) and industrials (11%) hold the next two spots.

VNM's large weight to financials is our main concern with this ETF. In addition to the banks being undercapitalized and faced with rising non-performing assets, the country’s financial system lacks transparency. It remains to be seen whether the reforms launched recently will be able to improve the health of the banking system.

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