The Vietnamese market was one of the fastest risers in the early part of this year, with the MSCI Vietnam index gaining 30.41 per cent between January and March.
However, on 20 August the president of the Asia Commercial Bank was taken into custody amid allegations of corruption, with further arrests following soon after. As a result, the market tanked by 10 per cent in a matter of days.
Performance of index over 6 months
Source: FE Analytics
It seemed to confirm investors’ worst fears about emerging markets – that they lack transparency and are prone to corruption – but Min-Hwa Hu Kupfer, chairman of the Vietnam Holding investment company, says this is far from the truth.
"The government is stepping up its anti-corruption drive, which is a positive," he said. "They recognised the damage that was being done to the image of the country as a place to invest in and they are reacting to it."
"As overseas investors, we think if they are moving against corruption it is very good news and we welcome it."
Juerg Vontobel, founder of Vietnam Holding, adds that overseas investors have actually reacted positively to the developments, adding to their positions, while it has largely been domestic investors who have wavered.
"The market hasn’t actually reacted violently; it lost an initial 15 per cent and then a further 5 per cent, so relatively modest falls. Foreign investors have seen it as a positive overall," he explained.
Marc Djandji, senior vice president at Indochina Capital, which runs privately managed portfolios in the region, says that the crisis changes nothing about the country’s potential.
"The demographics are good, the country is opening up to foreign investment, and it fits well into a China plus-one strategy – these are all factors that support Vietnam from the point of view of foreign investors," he said.
Djandji explains the country is the world’s largest exporter of pepper and the second-largest exporter of rice. It also exports huge amounts of coffee and seafood.
He cites the low correlation of the country to major international markets as extremely attractive for investors.
"It has not been within the same cycle as the world economy, it is still a domestic-driven, retail-driven economy. Foreign investors represent only 20 per cent of trading."
Data from FE Analytics shows that the MSCI Vietnam index has a low correlation to the FTSE All Share, MSCI Asia Pacific ex Japan and MSCI Emerging Markets indices.
Correlation of indices over 3-yrs
| Name | FTSE All Share | MSCI AC Asia PacifiC ex Japan | MSCI EM (Emerging Markets) | S&P 500 |
| MSCI VIETNAM | -0.07 | 0.24 | 0.21 | 0.04 |
Source: FE Analytics
Djandji also says that the recent arrests should not deter investors.
"Our view is ‘let the market panic’; it’s positive if the government is getting a handle on corruption," he said.
Industry heavyweight Dr Mark Mobius has a 7.96 per cent weighting to the country in his Templeton Frontier Markets fund, compared with 2.51 per cent from the MSCI Frontier Markets index.
However, Mobius’ fund has a higher correlation to major markets than most other frontier market portfolios.
Over three years – beyond which time data for some of the markets is unavailable, making a comparison impossible – Templeton Frontier Markets has a significantly higher correlation to the UK than the individual markets it invests in.
Correlation of frontier markets and fund to FTSE All Share
| Name | MSCI Nigeria | MSCI Qatar | MSCI Ukraine | MSCI Vietnam | Templeton - Frontier Markets |
| FTSE All Share | 0.24 | 0.08 | 0.38 | -0.07 | 0.56 |
Source: FE Analytics
The Vietnam Holding trust is an option for investors in the closed-ended space. It is up 62.12 per cent over one year, significantly more than its MSCI Emerging Asia benchmark, which is down 0.73 per cent.
Vontobel says the team has not made any changes to its portfolio following the scandals, and remains positive on some of the country’s banks.
Three quarters of the Vietnam Holding portfolio is invested in agriculture and domestic consumption.
Vontobel explains this provides protection against inflation, as agriculture does well in a high-inflation environment while consumption suffers.
In May, Vontobel and Hupfer told FE Trustnet that Vietnam was set to be the next Asian high-growth story.