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.