The Vietnam Fund returned +0.4% in January with a NAV of USD 1,862.70, having a return since inception of +86.2%. This represents an annualised return of +16.3% p.a. The January performance of the Ho Chi Minh City VN Index in USD was +12.8%, while the Hanoi VH Index gained +7.8% (in USD terms). The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.89%, a high Sharpe ratio of 1.81, and a low correlation of the fund versus the MSCI World Index USD of 0.25, all based on monthly observations.
The positive momentum in the largest companies continued throughout January. On the back of many solid earnings reports many index stocks reached new highs. Though, despite those index gains, the market breadth deteriorated considerably again in the second half of the month, as described further below.
The current market situation can be easily described as follows:
- passive investments are still favored worldwide over value investing
- foreigners continue to invest into Vietnam
- large investment funds have to invest their cash into the big and highly liquid companies
- analysts have called for a correction in many of those stocks for some time now
All of these facts have resulted in a market rally which looks rather unreal for many long-term market observers. Unlike in other broad based, healthy bull markets where on days with strong index gains the majority of stocks also participate in the rally, the current sharp index increase in Vietnam is best described as panic buying, triggered by new overseas money and local retail investors jumping on the bandwagon. The below breakdown of the trading day on 25th January – after a two-day break caused by technical problems on the Ho Chi Minh Stock Exchange – gives an excellent example of how distorted the market currently is.
Out of more than 350 stocks listed on the HCMC stock exchange, the 22 stocks which each have a market capitalization of more than USD 1bn were almost solely responsible for one of the highest one-day index gains we have witnessed so far this year (+1.6%). While we can understand the reasoning behind this action, it is very unusual for an emerging market to act in such a manner. Even in bigger and better diversified developed markets in Europe or the USA, an index gain of 1-2% would result in many more winners than losers and not with negative market breadth like we have repeatedly seen in Vietnam over the past few months. We still see people capitulating and selling undervalued and nicely growing small and mid-cap stocks in order to rotate into expensive large-caps. While analysts and strategists are now recommending the famous “buying on weakness”, what does that mean when a stock is trading at 30x earnings, while it was trading at 15x just a year ago – waiting for a 50% correction or buying at a still expensive 27x earnings after a 10% correction?
With 2017 earnings announcements slowly coming to an end, we can have a look now at the top ten 10 holdings which have already reported. Net of extraordinary income or provisioning, we saw very strong earnings growth in our 10 top holdings, averaging 38% for 2017. These 10 stocks (similar to to the rest of our portfolio) are trading on an average valuation of just 9.4x 2017 earnings which puts us in a completely different world than the biggest 22 stocks in HCMC which are trading on a trailing PE of 38x, and many of which haven’t reported their results yet. Even excluding FLC Faros Construction (Stockcode ROS), which boasts a PE of 197x, the big caps would still be trading at 27x earnings. Investing in those expensive stocks would make us very nervous on any onset of a market correction when investors just don’t care about market cap.