Although emerging markets continue to grow at a torrid pace, some faced severe weakness in 2011 during the height of the eurozone fears and concerns over American growth. As these issues have subsided in recent weeks, investors have piled back into these developing nations riding many of them sharply higher.
Of these countries, Vietnam represents a particularly intriguing case in this trend given its performance over the past year. The main ETF tracking the country, the Market Vectors Vietnam ETF (VNM) sank by nearly 47% in 2011, among the worst performances in the entire emerging world in the time period. In fact, this compares extremely unfavorably with the broad emerging market performance during the same time frame as products in this segment fell by ‘just’ 21% during the same time frame.
These horrendous losses were likely due to a few key issues in the country. First, inflation is running rampant and has impacted savers and lower income consumers, of which Vietnam has many. This has led the Central Bank of the country to boost rates which has impacted growth across the board, making the Vietnamese economy very weak throughout the year (read Australia ETFs: A Developed Market Play On Asian Growth).
However, while inflation is still high in Vietnam, it appears as if the country is finally starting to turn the corner. The State Bank of Vietnam slashed its refi rate by 100 basis points to 14%-- the first cut since 2009—while it also brought down the discount rate and the deposit cap by a similar margin as well. While this is somewhat troubling considering inflation is still in double digits, the rate in February was roughly 80 basis points lower than it was in January, suggesting that the worst may be over from this metric.
Thanks to this, the central bank appears to be confident that it can slash rates in order to help boost sagging growth without too much risk in terms of further price increases. “The rate cut aims to support growth, as inflation pressures have eased and liquidity in the banking system has improved,” said Hai Pham, of Australia & New Zealand Banking Group Ltd. “The central bank is confident about the inflation trajectory.”
With this focus, Vietnam looks to get the economy growing back up above 6% once again this year after slumping to 5.9% growth in 2011. If inflation continues to fall and the lower borrowing costs have a simulative effect, this target could be easily doable, possibly boosting the Vietnam ETF in the process (see Five Cheaper ETFs You Probably Overlooked).
In fact, investors are already starting to see a strong rebound in this fund to start the year as VNM has added about 15% in the past month and close to 36% in year-to-date terms. This trend could confirm the path of VNM to start the year, suggesting that investors who have a high risk tolerance may want to consider making a play on the Vietnam ETF this year (read Top Three Emerging Market Consumer ETFs).
While the product is extremely risky, as we have seen over the past year, it is certainly capable of producing huge gains. So for investors who are light on emerging market stocks, the profile below of this Van Eck fund could be very useful in determining whether the country deserves a spot in your portfolio, at least for the short term.
VNM In Focus
VNM tracks the Market Vectors Vietnam Index, which is a benchmark intended to give investors exposure to the broad Vietnamese market. The index is rules-based, modified cap-weighted, and float adjusted, charging investors 76 basis points a year in fees after waivers (investors should note the waiver is expected to expire on May first, possibly pushing expenses to 0.92%).
In terms of holdings, the product has 34 securities in total, with a heavy focus on medium- and small-cap securities. In fact, large caps make up just 13% of the total assets in VNM with the plurality going toward mid caps instead. Additionally, it should be noted that close to 40% of the portfolio consists of companies that are from outside Vietnam but do a substantial portion of their revenue in the Southeast Asian country.
From a sector perspective, financials and energy dominate as banking firms make up roughly 44% of the portfolio while energy account for another quarter of total exposure. Given the heavy focus on financials, the inflation rates and banking metrics such as deposit rate restrictions are likely to impact the fund a great deal going forward. As a result, the trend on price increases and banking worries could be a huge driver of this product going forward this year.
For investors who believe that these positive trends will continue, VNM could be a great pick. However, risks remain high within the country and inflation is still above any other major Asian nation at this time. If price increases continue to fall though this will likely override any ongoing worries suggesting that if Vietnam can keep things under control, VNM could be an intriguing choice for investors this year.