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David Kimberley
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Updated 13 Sep 2022
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Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Vietnam Enterprise Investments. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

  • Vietnam Enterprise Investments (VEIL) has reported its half year results for the period ending 30 June 2022. In a tough period for markets globally, VEIL delivered a NAV total return of -20.1%. This was 1.1% ahead of the trust’s benchmark, the VN Index, which fell by -21.2% in the six-month period. That outperformance was partly the result of the trust’s overweight positions to the consumer discretionary and software & services sectors.
  • However, volatility is common in emerging markets and it should be noted that VEIL’s objective is to deliver outperformance of its benchmark, the VN Index, over rolling three-year periods. On this basis, VEIL delivered annualised total returns of 14.2%, compared to 9.8% for the index, in the three years to the end of June.
  • Over the reporting period, VEIL spent $46.5m buying back 2.3% of shares outstanding to manage its discount. The trust’s board seeks to actively manage the trust’s discount, with the goal of avoiding large discount fluctuations relative to other single country investment companies in Asia (ex-Japan). Despite these efforts, the trust continues to trade at a wide discount to NAV. At the end of the period this stood at just under 16% and has since widened to almost 20% as at 08/09/2022, above the five-year historical average to the end of August of 13.7%.
  • Vietnam has considerable potential appeal for many investors, even taking into account the headwinds of the current macroeconomic environment. GDP growth looks like it could hit the government’s target of 6.5% - 7.0% in 2022 and inflation, currently at 4%, is much more muted relative to other developed and emerging markets. VEIL’s managers believe the portfolio is set to achieve earnings per share growth of approximately 20% this year, despite the high-base effect of a substantial 58% increase in 2021.
  • The chairman of the board, Gordon Lawson noted these strengths, saying: “We believe that Vietnam continues to offer one of the strongest structural growth outlooks among developing economies, led by industrialisation and urbanisation and strong domestic consumption. We think that this is where investors will see long-term growth, even with various pressures that might arise from global concerns. VEIL is confident of its ability to continue to identify the best companies for long-term business growth, profitability, and solid management.”

Kepler View

Vietnam Enterprise Investments (VEIL) offers investors dedicated exposure to the fast-growing Vietnamese economy. The trust managers run a high conviction strategy, sifting through a universe of over 1,600 companies to produce a portfolio that is typically made up of 25-30 stocks, with the top three holdings currently accounting for approximately a third of the portfolio. The managers believe increasing incomes, urbanisation and consumer spending in Vietnam are likely to drive returns in the portfolio, which is why they tend to be overweight to financials, retail and consumer goods.

The first half of the year has undoubtedly been a tough period for VEIL and emerging markets as a whole. Inflation, the war in Ukraine and recessionary fears have all acted as substantial headwinds to the trust’s performance despite Vietnam’s robust economic numbers and EPS growth averaging 26%. However, performance has improved since the end of the reporting period, with the trust’s NAV up almost 7% from the end of June to 08 September. The share price has lagged behind, rising less than 2% over the same period.

Volatility is the norm in emerging markets and given the extremely chaotic year we’ve had, it shouldn’t be surprising that both VEIL and its benchmark index have seen declines. But markets have not been discriminating in selling off and, as arguably illustrated by the wide discount at which VEIL now trades, there is reason to believe they’ve been unduly harsh on the trust, given that the macroeconomic and corporate earnings outlook remains solid. The trust has the explicit objective of outperforming its benchmark over rolling three-year periods and, on that basis, it has still managed to deliver total NAV annualised total returns of 14.2%, compared to the 9.8% generated by the VN Index over the same period to 30 June.

Looking forward, there is plenty to be optimistic about as the case for Vietnam remains strong. GDP growth looks set to remain much stronger than other emerging markets, with 7% a real possibility this year, given the 6.4% expansion in the first half of the year and Vietnam’s tendency to deliver a stronger H2. Inflation – currently at around 4% - has not impacted the country as severely as it has in other countries around the world. The currency is well-supported and has been relatively very stable, depreciating just 2.4% year-to-date. Exports also rose by 17.3% in the first half of the year and industrial output increased by close to 9% in the same period, indicating that Vietnam continues to be a go-to for supply chain relocation. In the VEIL portfolio specifically, earnings growth remains robust, with companies in the portfolio set to average EPS growth of around 20% this year. The managers believe this trend is likely to continue into 2023, with forecasted EPS growth of 15%.

Despite these positives, the trust’s discount has widened to almost 20%, which is far wider than the five-year historical average, to the end of August, of 13.7%. Moreover, valuations remain comparatively low. The Vietnamese market has a forward price-to-earnings (PER) ratio of 9.3x, despite forecast average earnings growth of approximately 20%. This is the lowest PER Vietnam has had over the past five years and it means the country has a lower valuation than its regional peers, even though its earnings growth forecasts are superior.

It’s plausible that pressures from the myriad macroeconomic problems the world is facing will continue to crimp share prices in Vietnam over the short term. However, Vietnam’s outlook remains positive and the VEIL managers have proven themselves adept at taking advantage of the opportunities the country offers by delivering strong returns for investors over the long run, with annualised returns of 15.7% over the ten years to 08 September 2022. While there are clearly no guarantees here, and further losses are possible, with the trust now trading at a sizeable discount compared to its own historical average, investors may stand to benefit from an additional uplift if performance continues as forecast and share prices pick up as a result.

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