The Vietnam Fund lost −1.3% in July with a NAV of USD 1,777.44, bringing the return since inception to +77.7%. This represents an annualised return of +13.3% p.a. The Ho Chi Minh City VN Index in USD lost −2.0%, while the Hanoi VH Index lost −1.6% (in USD terms). The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.77%, a high Sharpe ratio of 1.45, and a low correlation of the fund versus the MSCI World Index USD of 0.25, all based on monthly observations.
Recent market behaviour points to a further stabilization of emerging market stocks after turbulence in recent months. We saw a general recovery from the lows in several markets including Vietnam.
As expected, we have also seen declining volatility. While big caps also led this rebound, we have noticed smaller companies with decent Q2 earnings receiving a lot of attention from investors.
Periodic uncertainties in all markets, and especially in emerging markets, are healthy and necessary to bring down unrealistic expectations. Letting out the proverbial surplus of air from the bull market balloon like in the chart above averts an inevitable larger correction later on, something we have seen during periods of extended speculation over the past 40 years when investing in emerging markets has become fashionable.
We are happy to see investors in value stocks continuing to be mostly bullish as we are. In being able to attract new investors, we were not forced to trim down our holdings like many other funds had to do, including ETF’s, but instead we were also able to either enter new investments or increase existing holdings in attractive companies which were pushed down for no fundamental reasons by these forced sellers. After the release of the second quarter results from around 50 (around 70%) of our holdings, we are very happy to see that 29 of them are trading at less than 8x expected earnings for 2018 and 8 of them are trading below 5x expected 2018 earnings.
Another stabilizing factor we saw last week was the change in the reference rate for the USD/VND which was raised 1% by the SBV to 23,273 from 23,050. Due to high demand from banks, the SBV sold USD 2bn in six business days through 20th July, curbing the SBV’s foreign reserves to below USD62bn. However, banks were not interested in the SBV’s new asking price and no banks registered to buy from the SBV that day as they could trade at a much lower price of 23,230 in the interbank market. These actions offer more psychological support to the market than a real change in competitiveness against other Asian currencies as they fluctuate much more against the USD than the Vietnamese Dong. How little has changed is shown in the charts of the VND against the currency of another important export market, the European Union, and the VND against the currency of the largest competitor for Vietnam as a production hub, China. Both currencies had swings of 7-10% over the past year just to stay on a more or less level footing. In our view it makes much more sense to use our time to explore and analyse the opportunities in Vietnam than trying to “guesstimate” currency moves which are beyond any reasonable predictability.