Buying opportunity for Vietnam Enterprise Investments

The Vietnamese stock market had a fantastic year in 2017 with a gain of 52.7% when measured in US dollars, but since April the index has experienced a sharp correction. It appears that the sell-off was triggered by wider fears about the Emerging Markets and this has created a buying opportunity for the London-listed investment trust, Vietnam Enterprise Investments (LON:VEIL).

Vietnam is experiencing robust economic growth of around 7% per annum, helped by positive demographics and an emerging middle class. It is also benefiting from strong levels of foreign direct investment as the country is increasingly being recognised as an attractive manufacturing hub in view of the fact that its labour costs are less than half the level in China.

Another plus point for investors is the improvement in liquidity on the local stock market as a result of the relaxation of Foreign Ownership Limits and the government’s privatisation programme.

Significant upside over the medium-term

All of this has led the broker Numis to add Vietnam Enterprise Investments to their list of recommendations as a trading buy. They are also backing VinaCapital Vietnam Opportunity (LON:VOF),as they believe that both funds are well managed and have significant upside over the medium-term due to the positive fundamentals.

Vietnam is expected to have a current account surplus of around 3% of GDP this year, and it appears that there are sufficient central bank reserves to achieve the 2% per annum depreciation target for the Vietnamese dong against the US dollar without having to tighten monetary policy.

Like other Emerging Markets, the country has significant external debt, which is equivalent to around 50% of GDP, but it doesn’t seem to be at risk of an exodus of capital, as a large element is represented by overseas development aid from organisations like the World Bank.

The Vietnam Stock Index (VN Index) rose by 52.7% in 2017 and had a positive first quarter, but it is now down 26% from the peak. Year-to-date the market has fallen by 9% in US dollar terms with just 63 of the constituent stocks up and 273 down.

Normal for a market to weaken after such a strong run

It is normal for a market to weaken after such a strong run, yet the problem seems to be investor concern about the Emerging Markets in general and the impact of the strong dollar, although there are plenty of other global risks including a possible trade war.

Vietnam Enterprise Investments has a concentrated portfolio of 36 stocks with the 10 largest positions accounting for half of the net assets.The main sector weightings are Real Estate, Banks, and Food & Beverages, with the managers aiming to outperform the VN Index on a rolling three-year basis.

VEIL was launched in 1995, but was originally listed in Ireland and only moved to the Main Market of the LSE in July 2016. It is managed by Dragon Capital, which is one of the largest investors in the Vietnamese market. The fund is a decent size with total assets of just over £1 billion and the shares are available on a 16% discount to NAV. Long-term, risk tolerant investors might feel it is worth a go.