The VanEck Vectors Vietnam ETF (VNM) is the only ETF trading in the U.S. dedicated to Vietnamese stocks. The VNM ETF replicates as closely as possible, before fees and expenses, the price and yield performance of the MVIS Vietnam Index. Vietnam is a frontier market that carries numerous investment risks. It also may be the primary beneficiary of the ongoing trade war between the U.S. and China.
The risks of doing business in China have caused numerous businesses to migrate out of this communist nation in recent years. Additional negative factors like pollution, rising costs of labor and business, as well as an inconsistent legal system, also have contributed to the trend of companies leaving China. The flight of business out of China has accelerated during the last year as the Trump Administration's trade tariffs have proven effective in causing economic problems for the Chinese. U.S. tariffs on Chinese manufactured products have caused what may be a larger problem for the communist nation. Decoupling is when U.S. companies move their manufacturing out of China. This significant trend of companies leaving China to manufacture elsewhere is occurring at an accelerating pace. The obvious question is, where are these companies migrating to as they leave China? The graphic below illustrates the extent to which Vietnam is experiencing new inflows of business and capital as China loses. The trade war and the recent currency manipulation by China to devalue the yuan caused a dip in asian markets, including Vietnam. Technical indicators, such as the Relative Strength Indicator, or RSI, are showing that this Vietnam ETF has been very oversold. The chart shown below is from 8/7/19 when we first shared this trading idea with subscribers in our Trader's Idea Flow community. The price of this Vietnam ETF has moved higher since our subscribers received this idea.
The VanEck Vectors Vietnam ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS Vietnam Index (MVVNM), which is comprised of securities of publicly-traded companies that are incorporated in Vietnam or that are incorporated outside of Vietnam but have at least 50% of their revenues/related assets in Vietnam. In addition, the Fund may invest in securities of companies that I) are expected to generate at least 50% of their revenues in Vietnam or II) demonstrate a significant and/or dominant position in the Vietnamese market and are expected to grow. Expenses for VNM are capped contractually at 0.76% until at least May 1, 2018. Cap excludes certain expenses, such as interest.
The recent devaluation of the Chinese Yuan as a result of The People's Bank of China's currency manipulations has caused a dip in Asian markets like Vietnam. This dip may be an advantageous entry point for the long term in the VanEck Vectors Vietnam ETF.
Any Upcoming U.S.-China Trade Deal May Be Superficial Only
Recently, markets have surged on revived hopes for a trade deal between the world's two largest economies in the U.S. and China. Both sides of the negotiating table need a deal for economic and political reasons in their respective nations. However, even if any such trade deal can be constructed by these two economic rivals, the agreement may be only a facade that lacks substance. The reason is that China is unlikely, or possibly unable, to give up the unfair trading practices that this largest of the emerging market economies has been built upon for the last several decades. A trade deal that lacks substance and/or the ability to verify enforcement will likely ensure that this U.S. - China trade war continues for the long term. This would likely mean that Vietnam will continue to benefit from future decoupling with new inflows of business and capital into this frontier market. This continued positive action for Vietnam's economy could boost the chances for performance in the VNM ETF.
China's Economic Model Has Painted Itself Into A Communist Corner
Further exacerbating the rising tide of economic problems in China is the communist nation's long-term disregard of free market principles. This article from the South China Morning Post chronicles the nightmare debt scenario that China has brought upon itself at all levels of its economy. Because the continuation of China's extreme debt burden depends upon meeting pre-determined GDP growth targets set by the government, there's no room for the naturally occurring ebb and flow of growth that occurs in free market economies. Manipulating an artificial rate of growth via financial engineering and debt issuance over many years has its limits. China's communists who abhor the principles of the free market may be about to learn a painful lesson: Manipulating market forces often results in a reaction equal to or stronger than the action.
China's economic problems may be about to accelerate as business and capital continue to flee the nation. China's debt-fueled economic model for growth may be nearing the limits of its sustainability. The end of the speculative bubbles in Chinese real estate and debt markets may end very badly for this large, emerging market economy. In an effort to stave off the inevitable consequences of trying to manipulate market forces for too long, China may now be desperate to prop up its decelerating GDP growth by any means necessary. In fact, China may believe that propping up future growth rates of its GDP will require the continuation of their unfair trade practices, exploitation of trading partners, theft of other nation's intellectual property, and forced technology transfers. Without this litany of unholy trade practices the Chinese may find that decades of extreme leverage could become unsustainable in a sharply-decelerating growth economy.
The Chinese may determine that the house of economic cards they have built upon a mountain of debt may not allow for the implementation of fair and equal trade practices. The Chinese have an established record of trade conduct and may be unlikely to desire a change in this behavior. Fair trade practices by the Chinese, if implemented, could contribute to a further slowdown in their economy. This could be problematic for this over-leveraged economy.
The following candor in a statement by a Chinese official showed a rare glimpse of the actual condition of China's economy:
"Economic conditions are still severe both at home and abroad, global economic growth is slowing down, the external instabilities and uncertainties are increasing, the unbalanced and inadequate development at home is still acute, and the economy is under new downward pressure,” said Mao Shengyong, a spokesman for China’s National Bureau of Statistics, in a July 2019 news conference.
The statement above indicates a degree of desperation in this Chinese official's assessment of the Chinese economic picture. In this type of a stressful economic environment it would be interesting to see if China would be willing to honor the terms of any trade agreement that's reached with the U.S. Continued bad trade practices by the Chinese may continue as they have for decades. If China will not adjust its behavior, then it's likely that the trade war will enter a new round that will continue to benefit Vietnam through further decoupling. In this scenario the market performance of the VNM would likely fare well.
Trader's Idea Flow believes the extended era of rapid economic growth in the Chinese economy that has been fueled by extreme leverage and unfair trade practices is at a crossroads. Recent acknowledgements by the Chinese of their serious debt problems is an indication of how bad the situation has become. The over-leveraged debt burden of China is not going to be simply mandated into submission by any number of Chinese troops or communist directives. The Chinese are learning that market forces are powerful adversaries to have to combat. These communists in their nationalist ambitions, delusional central planning, corruption, and greed have built their mountain of debt into something that they may not have any means of actually sustaining.
Typically, emerging markets experience boom-bust cycles with the economic retrenchments giving the free market time to make healthy adjustments while a nation's financial infrastructure matures. However, the totalitarian regime in China has attempted to thwart the free market forces that are essential to a nation's efforts to build a stable economic foundation. The Chinese communists are the antithesis of conservative capitalists who believe in the free market economic model. The Chinese have attempted to manage the economic forces of the free market with the same authoritarian arrogance that these communists impose upon their national population. Now after decades of overly-ambitious growth and the accumulation of what may very well be an unsustainable mountain of debt the Chinese must continue to maintain unrealistic growth rates to support their house of cards debt burden. Because so much of China's economic landscape is controlled by the communist state the lines between corporate and government debt are blurred. The exact size and scope of China's debt problem may actually be unknown, even by China.
The significant outflow of business and capital from China due to bad trade practices is the last thing that China can afford at this time. Reaching a deal on trade with the U.S. would be the reasonable thing to do at this time to try and stem the tide of business leaving China. Next for China would likely be to find the means to subvert the terms of the trade agreement. Nobody should expect China to adhere to any agreement that would actually hurt China's efforts to achieve their growth targets. Call us cynical, but we do not believe that China has any intention of honoring an agreement that would put their over-leveraged economy at risk of default due to a sharply decelerating growth of GDP. Because China's current economy and its growth rates have been built on unfair trade, the implementation of fair trade would undermine growth targets. If growth targets are not met, then the chances for defaults on debt across China's economic landscape could increase significantly. For this reason, China may make an effort to feign compliance on a trade deal with the U.S. In reality, we believe that economic pressures combined with the poor Chinese track record of honoring its agreements are likely to prevail. The next round of the trade war is likely already beginning before this current round is completed. This forecast bodes well for the Vietnamese economy and the ticker VNM.
Decades of communist China's improper trade conduct finally elicited a response from the U.S. under the Trump Administration. Prior U.S. presidents failed to confront China effectively on its improper trade conduct toward the U.S. Consequently, the Herculean task of righting the wrongs of China's trade misconduct has been taken on by the Trump Administration. The trade war that China long ago chose to initiate against the U.S. and other nations has included the theft of intellectual property, forced technology transfers, closed markets, currency manipulations, and national security-risk trade deals. In light of such egregious trade conduct by China, reasonable people might well question how did we get here? This egregious trade conduct by China is not new so we must ask, who has been asleep at the wheel on the U.S. side of trade and foreign policy for the past few decades? Previous U.S. presidents, administrations, and the handling of both trade and foreign policy with China could have been better.
Geopolitics are an increasingly relevant factor in our investment and trading decisions today. This trend toward increased geopolitical influences impacting our markets may be accelerating. We must be open, honest, transparent, and critical of past U.S. leaders so that we can make more appropriate choices of who our future leaders should be. No less than the economic survival of America is at risk in this discussion. We must not be afraid to discuss this issue openly even if a few political feathers are ruffled. Effective change is a process not an event. Honesty enables America to handle the process of change to our nation's betterment.
The long overdue U.S. response in this Chinese-initiated trade war appears to have been successful. The Chinese may come to the table in October next month where we hope to gain concessions on trade that will be favorable to the U.S. This apparent trade victory, if it emerges in the weeks ahead, may be ephemeral. The Chinese may be unwilling or even unable to honor any trade agreements that would slow their economic growth. There's a mountain of Chinese debt that could become unsustainable if government growth targets for GDP are not met. Determining what China's actual growth rate is can be difficult because the Chinese government is patently dishonest. Analysts speculate that the Chinese economy may be an estimated 18% - 20% smaller than the communist propaganda advertises. This smaller economy could mean that the actual debt is much higher as a percentage of the GDP and the total economy. Not good. China's economic reporting would do well to focus on the facts and omit the propaganda.
There will be winners who emerge as beneficiaries as the trade war takes a toll on the Chinese economy and marches on to the next round. Already, Vietnam has been a clear, early winner as business has left China for Vietnam. Vietnam's nascent economic infrastructure is constrained and struggling to keep pace with the booming growth of business. However, the investments from foreign nationals continue to flow into this southern neighbor of China as infrastructure projects and building continue. This growth in Vietnam was taking place prior to the U.S. recent efforts to finally defend itself against China's decades of trade war attacks. Since the U.S. has belatedly responded to China's economic attacks, decoupling from China by U.S. (and Chinese) businesses has caused the growth in Vietnam's economy to accelerate. This growth in Vietnam may continue and the VanEck Vectors Vietnam ETF would be the likely beneficiary.
Members of our Trader's Idea Flow community always receive our trading ideas and updates first. Traders know that timing is everything. Receiving information early and being prepared ahead of the competition is valuable. Please feel welcome to free trial our marketplace service, Trader's Idea Flow. Just one successful trading idea can cover the cost of many years of the very affordable subscription price.
Disclosure: I am/we are long VNM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.