By Wayne Arnold
Sometimes, global investing is just like real estate: The only
thing that matters is location, location, and location.
Look at Vietnam. Suddenly, it's dawned on just about everyone
that this country with unrivaled sunrise views over the South China
Sea can not only back out of its deepwater naval base at Cam Ranh
Bay onto one of the world's busiest trade routes, but that its
veranda overlooks a lovely undersea garden of oil and gas
deposits.
It is resource-rich, one of the world's largest exporters of
rice and pepper and shrimp. Do you like instant coffee? Then you'll
love Vietnam's robusta beans -- it's the world's biggest exporter.
Did we mention the schools? Well, 94% of Vietnam's 90 million
people are literate, yet earn less than $2,000 a year on average --
a feature that helps explain why high-tech companies from Canon and
Intel to Samsung Electronics have invested in manufacturing
pieds-a-terre there.
No wonder some of the world's biggest powers are beating a path
to Hanoi's door. The United States, which you may remember fought
for a decade to keep the Communists from taking over, earlier this
month lifted a ban on selling them weapons - the better to fend off
incursions by its larger neighbor China, which claims the entire
South China Sea.
China, which also lost a war against Vietnam, sent its top
diplomat to Hanoi this week to patch things up after a summer spat
when China's state-owned oil company left one of its oil rigs in
waters that Vietnam considers its front yard. That led to a
maritime standoff that touched off riots at Chinese factories in
Vietnam that killed at least four people.
Vietnam has meanwhile invited India's state-run Oil &
Natural Gas Corp. (ticker: ONGC.IN) to explore for oil and gas in
the disputed waters. Indian president Pranab Mukherjee visited
Vietnam last month. This week Vietnamese Prime Minister Nguyen Tan
Dung visited Delhi and India's news media is reporting Vietnam will
sign a deal with India to jointly explore more of the South China
Sea.
Global portfolio investors are also taking renewed notice of
Vietnam. The Market Vectors Vietnam Exchange-Traded Fund (VNM) is
up 10% this year, while Ho Chi Minh's stock index has climbed
15.4%. The government's 10-year domestic borrowing costs have
dropped from 9.8% to 6.3% this year.
Since September, when global markets began to gyrate, however,
investors seem to be of two minds about Vietnam. While they're
increasingly willing to lend Hanoi more money for less, Vietnam's
stocks have fallen about 8%.
This makes little sense considering that most of the risk in
Vietnam lies, as in most old homes, in interior foundations, not
its external facade. True, Vietnam has managed to reverse a
once-persistent current account deficit, which has helped stabilize
its currency. And inflation is slowing. But as the International
Monetary Fund noted in its annual report on Vietnam this month,
budget deficits and public debt are rising as Hanoi boosts
borrowing from its citizenry to finance increased outlays and tax
cuts. Reform of its inefficient state-owned enterprises and rickety
banks, meanwhile, has suffered delays typical of any aggravating
home renovation. Corruption is high; infrastructure poor.
The divergence among investors, therefore, may have more to do
with the global retreat from risk than anything to do with Vietnam.
As investors brace for an increase in U.S. interest rates, they've
been pulling out of emerging market stocks and moving into U.S.
Treasuries and, to a lesser extent, higher-yielding emerging market
bonds.
That may provide investors who still have a stomach for
emerging-market equities with an opportunity to get in on the
ground floor of Vietnam's expanding role in Asia's export supply
chain. While stocks in Saigon are trading at roughly 14 times
projected earnings, which is high relative to their five-year
average, they pay an average 3.89% dividend.
But as HSBC economist Izumi Devalier notes in her report this
week on Asian trade patterns, Vietnam is stepping in to take over
some of the more labor-intensive manufacturing where China is no
longer competitive. Vietnam also stands to benefit from lower
tariffs under the proposed Trans-Pacific Partnership free-trade
agreement. The IMF expects Vietnam's economic growth to accelerate
from 5.4% last year to 5.5% this year, and then rise to 5.6% next
year, and Trans-Pacific Partnership hopes are already helping to
boost foreign direct investment.
Recovering global demand for Asian exports in recent months
means Vietnam will likely benefit and its own manufactured exports,
which are already growing at double-digits, will pick up more
speed. Mobile phones, for example, have surpassed garments,
footwear and crude oil as Vietnam's top export.
And higher exports in a developing country like Vietnam are
likely to have a much broader impact on domestic spending than in
more advanced nations. Private-sector and household debt in Vietnam
remain relatively low. That gives Vietnam's consumers and companies
a lot more space to redecorate.
Comments? E-mail us at wayne.arnold@barrons.com
Comments? E-mail us at asiaeditors@barrons.com
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