Judging solely by its three-month decline of 17%, it might appear hard to endorse the Market Vectors Vietnam ETF (NYSEArca: VNM) from the long side, but VNM’s recent bout of weakness belies long-term opportunity in one of Southeast Asia’s fastest growing economies.
Many foreign investors are targeting this frontier market to capture the country’s growth potential. The southeast Asian country is the place for greenfield foreign direct investments, leading other emerging markets by a wide margin, reports Glenn Barklie for the Financial Times. Greenfield investments refer to a form of foreign direct investment where a parent company starts a new business in a foreign country from the ground up.
Vietnam has enjoyed robust growth as investments and exports help support the economy. The country has brought in over 2,000 greenfield FDI projects between 2003 and 2014 as companies capitalized on the abundant and relatively cheap labor.
The Vietnamese government has also implemented reforms to attract investments. For instance, the country has cut corporate tax rate to 22% from 25%.
“After running a current account deficit for years, Vietnam now has a surplus of over $11 billion. In 2008, ahead of the global financial crisis, Vietnam underwent its own financial crisis with high inflation, a huge current account deficit, and a low foreign-exchange reserve. Its currency, the dong, was in free-fall. Now it is one of the most stable emerging currencies,” reports Assif Shameen for Barron’s.
The State Securities Commission said it would remove limits on foreign ownership of Vietnamese companies. The changes to foreign ownership limits are expected to take effect in September. Consequently, many expect overseas investors to jump into local markets.
Last year, Vietnam formed a commission to explore taking the necessary steps for the country to shed its frontier status and gain entry into the widely followed MSCI Emerging Markets Index.MSCI does not have Vietnam on its list of markets that could potentially be upgraded to emerging markets status. When the index provider recently revealed its annual market classification, Pakistan was the only frontier market highlighted as being a potential candidate for promotion to the MSCI Emerging Markets Index. [Vietnam Wants EM Promotion]
“The latest boom in Vietnam has been fueled by foreign direct investment, or FDI, in the manufacturing sector, as large Japanese, Korean, and Taiwanese companies switch from China,” according to Barron’s.
Market Vectors Vietnam ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.