TET Around the Corner

The decorations are up in Ho Chi Minh City as the party convenes to ratify the new leadership.  This time round the process is not predetermined.  The situation is fluid as we sit in the bar of the Hyatt Hotel.  For once no-one knows what will be announced next week (In the end it was an anti-climax as the head honcho stays in place and the progressive Prime Minister got the chop.).  There is even a sense that public opinion might be taken into account (it wasn’t).  One delegate hosted a page on Facebook featuring the main candidates where visitors could comment; and this site was not shut down by the authorities.  Evidence of a little more openness but French philosophy still seems to apply to politics in Vietnam in the sense that the more it changes the more it stay the same.

Yet there has been plenty of change here over the past two years.  The Hyatt remains the most pleasant place to stay, but its room rate is up about 25%, and breakfast is expensive if excellent.  One thing is still the same.  Coffee and tea shops are proliferating including one across the street.  That venue looked a lot more tempting when I got the chit to sign and saw what the Hyatt was charging for a croissant.  Breakfast is not included when you are on a corporate rate. 

I am here for a conference hosted by Ho Chi Minh Securities (HCS).  Vietnam has a good work ethic and HCS demonstrates that as we start each day at 7.40 am and cram in 13 company meetings over two days plus an overview on real estate from local expert CBRE.  Amazingly while the schedule changes several times in the days leading up to the conference all the companies that commit do turn up and only a few are late, victims of HCM City’s terrible traffic.  Full marks to HCS for an impressive line-up that covered almost every area of economic activity of importance in this country.  If you do decide to trade on the local exchange, you should consider them.  The other broker we work with is Maybank.

Congestion has become so bad that during peak periods the centre of the city becomes gridlocked, a pedestrian precinct full of cars.  No wonder a city of 8 million contains 6 million motor bikes.  A bike really is the only sensible way to get around.  The first line of MRT should be in service next year, but one line is not going to make much of a difference.  HCM City needs a proper network but that could take another twenty years.

Back to the Stock Market.  Vietnam has a lot going for it.  The Trans Pacific Partnership, if passed by the US congress will give the economy another boost.  Vietnam is expected to be the biggest winner.  FDI is booming as Chinese and Taiwanese firms in particular are ramping up capacity across a whole range of light industries.  On my flight in from Singapore, I sat next to an executive from a thread company who was coming to review sites in industrial parks for a new factory.

For a foreign equity investor, however, the situation is one of slim pickings owing to the 49% foreign ownership restriction.  Where we as potential purchasers of shares stand can be summed up all too simply.  If you want it you can’t buy it; and if you can buy it you don’t want it.

Not entirely accurate, but more or less correct.  Occasionally the good stuff becomes available; but you may have to wait a while.  If in a hurry, you can buy anything you like but only by paying a premium for foreign quota.  Premium can run as little as 5% to 20% or even more.  Stock market favourite Vinamilk has been above 30% : not a realistic way to trade when you have to mark to market.

Ah ha I hear you say : didn’t Vietnam pass a law to allow 100% foreign ownership only last year?  Well yes and no.  They did and in theory you can, but the first one out of the block to go the whole hog, Saigon Securities, got into a lot of trouble.  Now everyone else is nervous.  There are lots of things foreign controlled companies in Vietnam cannot do; and it would be easy for many businesses to fall foul of some restriction.  Of the thirteen companies we met over half wanted to open up, but not one had a plan to do so, nor did any of them intend to change without a clear endorsement from the government.

Reading between the lines and in other conversations with local experts, it is clear that the government is still in two or possibly three minds on this subject.  Having announced an intention to open up foreign quota some four years ago they probably felt they looked stupid after so much time had gone by and nothing had happened (they did look stupid).  So eventually a law was passed but the draft contains so much ambiguity and exceptions that everyone is scared to act for fear of contravening something else that would put their business at risk.  So in theory the government allows 100% foreign ownership.  In practice the law that is supposed to allow it effectively makes sure nothing changes, handicapping capital markets in a country where capital is still in short supply.

This ensures that would-be foreign equity investors are largely frustrated.  One would like to do more in Vietnam, but until the foreign ownership issue is resolved there is little opportunity for direct investment into the most interesting listed companies.  The most viable route is to sign up for one of the better managed single country funds.  Here I disclose that I am personally invested in Kevin Snowball’s PXP.  If you go to HCM City he is someone you should seek to meet as he understands corporate Vietnam as well as anyone, and is suitably cynical.

So where does that leave anyone who wants to invest in the country?  The answer look is look at property.  In the past there have been multiple restrictions on foreigners owning property in Vietnam.  You could only own one.  You were not allowed to rent it out and so on.  There still are restrictions, but in 2015 some of the biggest barriers were relaxed.  Importantly you can now rent, and also own more than one property, though still not land.  One disadvantage is that while in theory you can also get a mortgage, again in practice, you cannot.  That means foreigners are exposed to dong risk.  While the dong has been behaving a lot better of late it is more likely to be going lower than higher especially against the US$.  The only question is how much lower.  FX aside, all the ingredients – inward migration, family formation, and lower borrowing costs - are in place for an extended property run this time round.

Unlike most of the rest of Asia, Vietnam has not experienced a recent property bubble.  They overbuilt between 2007 and 2010; and that boom was followed by a major bust.  Come 2012/2013, and the market was close to comatose; but in 2014 it began a slow resurrection.  Some commentators are concerned that the explosion of projects expected in 2015/16 heralds another boom/bust cycle; but demographics, the supply demand imbalance, and improving affordability all suggest otherwise.

The next bust will start from a much higher level and in my opinion the peak is several years away.  Quality is improving.  The new condo towers are in a different league from those put up five years ago.  Still the path to purchase is not a straight line and it pays to have reliable local help.  I just took possession of my first unit in Novaland’s Icon 56 project located near the river and facing the Stock Exchange building.  The end product is decent and the river view is a big plus.  The rental market for the right location is lively.  I am adding to my portfolio in HCM City, but could not do it without the help of Chris Piro of Indochina.  If you are interested, consider giving him a call.  Mistakes can be expensive and Chris knows his way around.

Silent Nights in Panzano

Sorry for the silence but voyaging has been at a somewhat slower pace over the holidays.  We try and usually succeed to spend some of that period in Panzano in Chianti, a village that captures the Christmas spirit.  On Christmas Eve our resident celebrity Dario Cecchini, “The World’s most famous butcher” according to Google, holds his annual street party.  Usually over 20% of the village attends.  The turnout in 2015 was up to the mark.

Talk this year was of a wonderful harvest; both for grapes and olives, a 180° reversal of the disastrous 2014.  Everyone is upbeat and looking forward to the wine release in 2-3 years’ time.  In the meantime the olive oil is green, thick, spicy and luscious : a product you will never see in shops.    

The economics is something else.  You can make money with wine.  Olive oil is another matter.  Growers who use traditional methods lose money on every bottle they sell : so more is less, at least less money in their pockets.  Some have given up.  The groves next to our house containing over 1,000 trees went unpicked the last two years.  At the top of the road one grower ripped up all his trees over the holidays.  Our harvest this year was 550 bottles of exceptional quality.  We could have had more.  Fully costed but pre-shipping I estimate our cash cost at around Euro 18.50 per bottle.  At wholesale we could expect around Euro 7.50 if lucky.  Luckily we are our own best customers.

Still it does strike me as strange that a merely decent bottle of can wine retail for around Euro 40, while the very best olive oil struggles to sell at Euro 20.  That bottle of wine tends to disappear at one sitting, often along with another in our house.  Olive oil often survives to grace    vegetables and salads for a couple of weeks.  The quality gap between top end, handpicked, biodynamic extra virgin olive oil from old trees compared to the commercial mass produced product is every bit as great as that between a premier cru and village plonk.  Yet the price multiple     is only about 3x for the olive oil versus 50x or even more for wine.  Markets are not efficient whatever Professor Sharpe and the Nobel Committee claim.    

Even so grumbling about olive oil was more than submerged by enthusiasm for the latest wine vintage.  Indeed there is generally a much more positive attitude in the main square.  Tourism is on the up.  There is investment all around in agritourismos, new hotels, new vineyards, and improved wine production.  Hopes in this part of Italy are for a better 2016.  The lower Euro makes a difference.  The only worry related to the migrant invasion.  Italy cannot cope.  Chancellor Merkel and Prime Minister Renzi have very different views on how this problem should be addressed; and as importantly who should pay.  Local opinion is largely that Italy already has done more than its fair share, a sentiment supported by polling data, though this is a debate where accurate data does not often get a look in.

As to other matters of note at this sleepy time of the year, the biggest curse in our valley are the not so wild animals, both deer and boar.  They can be extremely destructive.  Yet the powers that be in Greve do not allow landowners to cull them.  That is why a valley that did not contain a single fence ten years ago affording a pristine view for locals and tourists alike now is interrupted by a series of wire fences separating vines and olive groves.  Both walkers and the scenery suffer due to bureaucratic stupidity.  The crazy system means a mandatory prison sentence for killing a pest, but if you kill a person you could avoid jail with a good lawyer.

The local ‘approved’ shoot has been enjoying this juxtaposition.  Two Saturdays ago they shot 21 boar in our wood, three just outside the garden gate.  Last Saturday they shot 15.  Our wood is not big.  The ratio works out to more than one boar per acre!  Sadly there are still plenty more where those 36 came from.  While nearly everyone views them as a menace we heard stories of hunters leaving food out to encourage larger families for next season.  It has even been suggested that people from other parts of Italy are paying to hunt here though I am sure such rumours cannot be true; and if by some small chance they are true, no-one in authority could possibly know anything about it. 

There is one small positive out of this.  We get given part of the ‘bag’.  So periodically a hairy haunch or two of boar turns up on the doorstep.  Skinning and softening a piece of wild pig is hard work and very time consuming even if the result is a rare treat.  We ended up enjoying some of our very own boar as Cinghiale Pappardelle at the local wine bar : Enoteca Baldi.  That was definitely a better way to benefit : get someone else to do the heavy lifting.

Mimmo Baldi of Enoteca Baldi

Still the valley needs to cull more.  There are so many animals Panzano is in danger of becoming a petting zoo.  Spent a good part of the last day of our Christmas break chasing three very fast and lively young deer that had found a way into our garden, but did not seem to be able to find their way out.  We had to call for reinforcements from Enoteca Baldi to make sure we had enough people to herd them to an exit.  When your garden is on several levels the deer have a definite advantage, but we got rid of the last one just before local restaurants stopped serving lunch!  Having run up and down steep hills for a couple of hours a Bistecca Fiorentina was badly needed, and well deserved.     

Salute to all my followers and the very best for 2016.