By Forbes 01/18/2014

It’s funny how investors rarely mimic this type of behaviour. Stocks which have gone down in price are viewed with suspicion. Something must be wrong with them. If a company’s in distress, most investors will put it in the too-hard basket. As for neglected stocks or markets, well there must be reasons for the neglect and further investigation requires work which many aren’t willing to do.
So-called frontier markets suffer many of the attributes which put off investors. They’re priced well off pre-GFC peaks, they have companies and sectors in distress and they’re completed off the radar screens of institutional investors. Add to this that many of these markets are in faraway places, with unfavourable political regimes and hugely volatile stock market price action given thin liquidity – and you have a perfect recipe for investor neglect.
In Asia Confidential’s eyes though, some of these frontier markets offer the best opportunities for investors over the next decade. And one of the most exciting opportunities is in Indochina. Today, we’re going to look at one of these markets, Vietnam, which is starting to attract investor interest after five years in the wilderness. It underwent a massive credit bust and is just coming out the other side. In many ways, Vietnam is 2-3 years ahead of China, which has just started to undergo its own credit bust.

Vietnam’s classic credit bust

I was working at a stock broker in South-East Asia in 2007 and remember the excitement generated then by some of the region’s smaller markets. At the time, Vietnam became the “it” market. Asia’s top sell-side economists and strategists poured into the country and waxed lyrical about the growth story there. I don’t think some of them were quite as bullish as their research reports relayed, but being a bull brought in plenty of money at the time. They were the go-go days prior to 2008 where there was too much cheap money and booming frontier markets got some love.
Then the GFC happened and these frontier markets were taken to the cleaners. Vietnam’s main stock market went down ~80%. Given its reliance on exports, GDP growth in Vietnam dropped from more than 8.5% in 2007 to close to 5% in 2009. The government tried to revive the massive credit boom through an aggressive stimulus program in 2009.
The printed money led to reckless lending, with credit growth of 35% Cagr from 2007-2010 and bank loan to deposit ratios peaking at 136%. Inflation rocketed to 23% in 2011, resulting in foreign investment drying up.
The latter was crucial given Vietnam’s reliance of foreign direct investment (FDI) to the tune of about US$12 billlion each year (or about 6x that of Indonesia relative to the economy, to put that in perspective).
Due to spiking inflation, the local currency, VND, dropped 40% in value from peak to trough. Vietnam’s strict capital controls didn’t prevent massive capital flight as savers exchanged local currency for gold and U.S. dollars (Vietnamese are estimated to have 50% of their net worth in gold and US$).
The government was forced to raise interest rates by 500 basis points and implement significant macro-economic reform. GDP fell to 5% in 2012, its lowest level in 13 years.

People go to a retail store searching for bargains. If an item is priced at a 50% discount, they might buy it or search a nearby store or online to see if they can get it even cheaper. If a store has a closing down sale, crowds often turn up in droves. Others sometimes do extensive searches for niche stores where few people go but there’s value for money.
Much of the reckless lending went into real estate. From 2009-2011, the government implemented several regulations to reduce credit to the sector, such as increasing taxes and restricting the ability of buyers to “flip” properties. From the peak levels of 2010, real estate prices have fallen 60%.

The above isn’t to suggest that the government was pro-active in initiating reform. Far from it. Like most governments, the ruling Communist Party in Vietnam fiercely resisted reform until they were forced into action by the dramatic bursting of the credit bubble.
In fact, the government only just started to restructure the banking sector last year. And it’s still largely held off from overhauling other state-owned enterprises (SOEs). This isn’t surprising given the vested interests of SOEs which were the biggest beneficiaries of the credit boom via the corruption which flourished at the time (remind anyone of China?)

Things are turning around

There are several signs though that the worst of the credit crisis may be behind Vietnam:
GDP appears to have bottomed with fourth quarter growth of 6% expected.

A key sector, A key Asector, manufacturing, is also rebounding.