Heather Manners has
no doubts. “The reason we are investing in Vietnam is because we see a very
simple, clear opportunity,” says the chief investment officer at Prusik
Investment Management, an independent asset management firm focussing on Asian
equities. It began investing heavily in the country at the end of 2011 and
continues to do so now, anticipating that the economy will be stimulated as
monetary policy eases.
Manners
first began eyeing Vietnam in the second half of 2011, when she saw that the
month-on-month inflation rate was much lower than year-on-year (YOY) inflation.
It then became clear that once the first quarter YOY was dropped from the
equation, the headline YOY numbers would have been much lower, with
month-on-month patterns annualizing in the 10% to 12% range.
“We
believe that such numbers pave the way for authorities to cut interest rates.
When you have cheap equities and falling interest rates, one thing happens:
equities go up. So it is a simple strategy, combined with the fact that no
one’s really talking about it,” she explains. At the beginning of 2012, she
made a call that Vietnam’s market would double in 18 months.
The
call has turned out to be a good one so far. Inflation is beginning to
stabilize at rates lower than initially expected, and forecasts are expecting
it to settle at around 11% to 12% in 2012, and to lower even further in 2013.
The Hanoi stockmarket has grown a staggering 42.9% year to date (as of market
close May 7), bringing it almost halfway to Manners’ 18-month forecast.
Darker times
But
it has not been all good news. “It was a market in decline for five years. The
Hanoi index from peak to trough had fallen about 87%. The currency too fell
quite significantly – by over 30%,” Manners recalls. Prusik was tracking the
Hanoi index as opposed to the Ho Chi Minh index because the former had more
mid-sized companies, fitting the manager’s profile better. “You were looking at
a stockmarket that had fallen in the magnitude of the Asian financial crisis
and as a result, we were looking at very cheap valuations.”
At
a median stock level, P/E valuations stood at about 5× or even cheaper towards
the end of 2011, and Prusik jumped in, which Manners observes was not the
stance of most managers in Vietnam. She notes that all the foreign brokers had
left the market and that nobody was looking at it as a venue for investment any
longer. “It was terribly unloved, but very cheap.”
2011
in particular was a difficult year for Vietnam, with the economy and the
stockmarkets going into a nose dive, thanks to the combination of three
factors, all of them in the first quarter: the government’s further
deregulation of prices; the removal of oil subsidies; and a sharp devaluation
of the currency.
While
Vietnam seems to be brimming with promise after several discouraging years,
Prusik is fairly limited in its choices in which stocks to invest.
“It’s
difficult to be picky in Vietnam,” Manners explains. “Much of the economy –
stockmarkets in particular – is made up of quite illiquid companies, or large
companies which are expensive, or those that have reached their foreign
ownership limit so we can’t buy in anymore. You have to step around those three
things to put together a portfolio. We have taken what I would say is a sort of
basket approach, as it were, and bought from a number of different companies.”
Working
around these issues has been hard work, but Manners believes they have managed
to put together a good portfolio. Most of Prusik’s investments are companies
with more of a domestic focus such as bakeries, jewellery, banking and
pharmaceuticals because in the medium to long-term, these are the companies
that, if one believes the history of the region’s stockmarkets, have better
sustained growth and benefitted more from other developing markets. Most well-managed
companies and domestic names with more exposure to consumer spending in the
region typically garner higher valuations than the more cyclical,
export-oriented businesses. In Vietnam’s case, “goods are good” because many of
its people now have disposable incomes that they are eager to spend.
Vietnam,
she says, is an interesting place to invest, not least because it feels a few
years behind its more developed Asian counterparts. “So there are some really
well managed companies which present themselves nicely, and there are some
other companies that haven’t quite grasped what investors want to hear yet, but
they’re getting there. As usual, it’s picking one’s way among a combination of
the [bottom-up analysis] at a company level, with what movements governments
are making.”
The
movements that Manners is watching in particular is if the government can have
effective recapitalization and rationalization in the banking sector, if the
overhang in the property sector is clearing and if there is enough momentum to
spur the streamlining of the state’s finance sector.
“So
far the signs are good, but one shouldn’t be so certain. I think one has to
remain quite sceptical, but at the moment we are still in an early enough stage
of the main story. We can probably afford to worry about that later in the
year, and we are seeing enough being done
at
the moment.”
Prusik,
however, is watching valuations carefully. Valuations remain extremely cheap at
present, but as Vietnam garners more public attention and continues to perform
solidly, Prusik is on guard for a sort of “gold rush” – if people suddenly
decide to begin investing in the region. This rush of investors, Manners
anticipates, could start within the year if momentum continues.
Positive on more
Manners
runs two of Prusik’s three funds (totalling US$190 million), the Prusik Asian
Fund and the Prusik Asia Smaller Companies Fund. After months of increasing
their weighting in Vietnam, both funds now have about 15% invested into the
country, a proportion she believes is healthy enough to stick to. Beyond
Vietnam though, Asean is a major theme for the company – the Asian Smaller
Companies Fund has as much as 70% invested into the region. Particular
standouts are the Philippines and Thailand.
She
calls the Philippines’ structural story the most interesting in the region at
the moment, with a new president whose confidence and clean image have
engendered more business to come to the country. It is the sovereign’s first
major capital expenditures cycle since the Asian financial crisis, and
liquidity remains abundant with healthy banks. The Philippines, she believes,
runs little risk from the financial world.
“Geographically,
Thailand is perfectly located,” she comments. “As Myanmar emerges and Vietnam
recovers, Thailand is right in the middle. You can still find interesting
companies on a stock level.”
Myanmar’s
emergence is a major story for Prusik as well, and Manners is looking forward
to more and more opportunities for foreign investors to come up, especially for
her smaller companies’ fund. Developments taking place in Myanmar will bring
with it massive changes for Vietnam, Cambodia and Laos as well.
Prusik,
which has offices in London and Singapore, is carefully watching China at the
moment. “We think it looks really cheap, no matter what quantitative screens we
look at.” She says that there is a foundation set for a strong performance from
Chinese equities, but it is still waiting for a catalyst to spur that growth.
Overall, Manners is extremely bullish on the future of the region.
“People
talk about markets being highly correlated, but the dispersion of returns has
risen. Actually, if you look at the 12-month return to the first of May, it is
anything but [a correlation],” she says, giving Asia’s wide-ranging markets as
an example. Over the last 12 months of performance, the spread between the best
and worst market in the region is a surprising 50%, with the Philippines up 22%
and India down 26%.
“I
think this is essential to remember, because I still think there are a lot of
people who have been wary of developing markets or emerging markets like Asia
because they are worried about macro risk globally. But as a matter of fact,
there has been a quite different tune being played in markets with strong
fundamentals and, in my view, rightly so.”
While
she is hesitant to put numbers as precise as her forecast for Vietnam was,
Manners is confident that along with the development of the middle class in
Asia and the emergence of China as a superpower, the Asean region’s rise over
the next decade or two will be looked back on as the third major investment
theme in Asia. “We cannot really underestimate how important Asean is going to
be from the point of view of development. It is going to keep changing and
growing along with the upsides it could potentially generate.” Even if the
Western world slides into another recession – as many fear – she is confident
that though Asean may indeed be affected and destabilized, it will not veer the
region off its strong and very definite path to growth.
Nina
Pablo
Business & Investment Opportunities
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