Thursday, April 26, 2012

How to Buy a Dollar for Sixty Five Cents

Readers know very well that I am a big fan of the frontier market economies of SE Asia. I am talking about Cambodia, Laos, and Myanmar. At this point there is really not very many ways average investors in the west can invest in these places. As these countries develop I am confident that ETF’s, private equity funds, and other investment vehicles will become available that will allow us to participate in the growth of these “tiger cubs”. While researching the above mentioned countries I kept reading about Vietnam. Although Vietnam is not a frontier market it has still not, in my view, graduated to emerging market status yet. Before the 2008 economic crisis Vietnam was the darling of the financial press and was the quintessential frontier market. After the 2008 crisis the bloom came off the rose so to speak and the Vietnamese economy was thrown into a bit of chaos as foreign capital flow either stopped or was repatriated. In addition the government pursued some poor decisions with regards to monetary policy and the currency, known as the dong, was devalued leading to high inflation.

Recently however the government has realized the error of its ways and has moved to privatize some state industries (which account for 60% of GDP), notably Vietnam Airlines. One of the most important changes has been the appointment of a new head of the central bank and tasking the bank with getting inflation in the country under control. Credit growth has gone from 28 percent per annum last year to a recent 12 percent. At the same time inflation fell to 14 percent last year and will fall further this year. Regarding the currency, there has been no devaluation of the dong since February 2011. Because of these policies the currency was the most stable currency in the region last year. Readers will recall that I look for economic or political catalysts, those small changes at the margin that in a small economy like Vietnam’s can lead to big economic gains. With the currency and financial reforms this appears to be the case. The other major catalyst is that Vietnam is now becoming one of if not the cheapest place to manufacture in Asia. This has led to Intel, for example, building it largest chip plant in Vietnam.

So that is the quick and dirty on where Vietnam has been and where it appears it is going. How to play it? Over the last five years the Vietnamese stock market is off 70% from its highs. The market has begun to recover this year and is up around 12%. There are two ETF’s but they are not the best way to participate in my view. These two ETF’s are for the lazy and are populated by institutions that just want Vietnam exposure and do not want to do any hard work. The way I am playing Vietnam is via the VinaCapital Vietnam Opportunity Fund (VOF). The VinaCapital Vietnam Opportunity Fund trades on the AIM board of the London Stock Exchange. If you have a broker that can buy foreign stocks it should be easy to purchase. The more typical and more difficult way is to buy shares on the pink sheets here in the US. The shares trade via the symbol VCVOF. I will state emphatically that if you choose to go this route you will have to use limit orders and be very patient.  It will take some time to build a position but this should be a looked at as a long term investment and not a trade. The reason I like VOF is because the people that run the fund are in Vietnam and invest in both listed securities and private equity deals. Having a team on site means relationships and access to people who know what is going on and who are able to facilitate deals that the ETF will never be involved with. This should lead, over time to better returns, as the fund is able to arbitrage their information advantage. This in itself should be reason enough to buy the fund. However the VOF is a closed end fund and is currently selling at approximately a 35% discount to net asset value. What this means is that you are literally buying a dollar for sixty five cents. If one looks at the historical relationship between the share price and the net asset value of VOF one would note that before the financial crisis in 2008 they tracked pretty closely. In fact there were some periods of time when the share price traded at a premium to net asset value. The management of VOF recognizes the substantial undervaluation and has been buying back shares on a regular basis. So the thesis is we have a growing emerging market that is getting its act together economically. We have identified an investment vehicle that is trading substantially below net asset value and that is run by people who have boots on the ground and know what is going on in the country. I think that if you have an investment time frame of three to five years and can be patient you could do very well buying shares of (VOF). This is not investment advice so please do your own due diligence as you are responsible for your own investment decisions. A link to the funds website is provided here.

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