The kind of factors you want to have at the forefront of your mind when picking stocks in developed markets also apply to a stock market like in Vietnam. Yet when we explore some of these factors, investing in a frontier market may warrant some subtle changes in our thinking in these areas. I shall explore how we might slightly adapt our thought processes when picking stocks on the Vietnam stock market.
5 TIPS ON HOW TO BEST INVEST IN STOCKS IN VIETNAM FOR RETIAL INVESTORS
- Valuations matter
- Management
- Think long term
- Switch off to the market noise
- Understand the business
Vietnam stock market valuations matter – In today’s markets globally it seems fashionable to want to search for companies with an exciting story. Also one with maybe no immediate earnings, but a prediction that the explosive earnings growth comes in 5 years’ time and is extrapolated in perpetuity. Caution is needed chasing exciting growth stories in today’s markets.
The major stocks on the VN Index generally do not reflect such wild optimism. The Vietnam stock market P/E ratio looks reasonable and likewise the forward P/E ratio in the context of interest rates that have declined. Also in the context compared to other Asian markets and the relative longer term growth in Vietnam.
Given the strong macro growth backdrop of the Vietnam story, one should be open minded about the P/E ratio to pay. For example, I would keep in mind the PEG ratio when searching for Vietnam stocks. If you can find earnings tailwinds that suggest growth of circa 20%, maybe a P/E of 20 could be cheap, i.e., a PEG ratio of around 1.
I would also keep in mind the popular rule no 1 of don’t lose money! Whilst I acknowledge that a company’s asset backing might not be as good a measure to use nowadays as good technology stocks often are underrated on such measures, it still can be useful to analyse. It can help with to limit downside risk in a stock’s share price. What is a cheap price to book ratio really is very company specific but it might be a measure to keep your eye on. A P/B of well under 2 could be cheap given the context of the MSCI All Country World Index these days trading at a P/B of close to 3.
Management of Vietnam stocks – Management is a logical key factor to identify here, but for many investors looking at the Vietnam market, you probably have to work harder to research this area. Investing in your home country you might already be quite familiar with key management personnel’s history, or if not then you know where to search to find out more.
Investors in frontier markets that are quite experienced in this area often tell stories of very “interesting” things going wrong with management. Basically they often centre around less than perfect market regulation, conflicts of interest, related party dealings, oppressing minority shareholders etc. I am not directing criticism specifically at Vietnam here, just more noting that far more experienced investors than me cite these concerns as a rule of thumb across many Asian stock markets, particularly markets that are emerging.
You should be trying to locate any red flags with your research. How many related party transactions take place? Does the company avoid buying back shares when they are cheap, yet are focused on empire building and constantly issuing shares? Do management get granted overly generous share bonus schemes? Are they flamboyant characters that spend money wildly on themselves and also with expensive “work” facilities and business trips?
Some of these questions might take a lot of digging around to find out if you can uncover such things at all. Sometimes though it is worth a try to search online with relevant industry forums, past associates of the key management personnel, suppliers and / or competitors of the company. You never know where thinking a bit outside of the box might lead.
Long-term thinking with Vietnam stocks – There is additional reasons I would say why we should encourage long-term thinking when it comes to the Vietnam stock market compared with more developed markets. To start with we can expect a bumpier ride in terms of volatility in a frontier stock market like Vietnam. I think this might even be exacerbated by the high prevalence of new traders that have jumped on board in the last year or so. I discussed the theme of growing numbers of beginner retail investors in the Vietnam stock market in my last blog post here. WHAT F0 INVESTORS MEAN IN THE VIETNAM STOCK MARKET, CHICKEN TRADERS? – VIETNAM STOCK MARKET (vietnamesestockmarket.com).
With potentially increasing volatility, I believe a longer-term approach is more suitable so you don’t panic out of good stocks at the wrong time. The longer-term structural story is still bullish so that in my opinion is what you should be focused on.
Also aspects specific to the mechanics of the Vietnam stock market also favour a longer term approach. I refer to issues such as costs of over trading perhaps from brokerage fees, buy/sell spreads and liquidity, FX conversions etc. If for example you are living in the US and trading your own market these things may not matter as much but could be more important to consider in Vietnam.
Then there are taxes, no matter what market you are playing in, often keeping your taxes lower is a very underrated aspect in investing. If the macro backdrop is positive in Vietnam, why not take a lower turnover approach to take advantage of this aspect. You are not like a fund manager who might have to continually sell a marketing story of actively switching in between popular stocks, or only focused on pre-tax returns which they often are.
Switch off to the market noise, reading Vietnam annual reports – A flow on effect from any increased volatility and volumes from retail traders in the Vietnam stock market might be suddenly we see many social media stock “gurus” pop up.
Ignore them.
It is becoming a competitive area of late across the world for so called gurus, but it can be lucrative for those that build a huge audience. Many will mistake such a big audience as meaning they have some special insight and skill on the stock market. The reality is if they are getting enough dollars directly via spending hours every day uploading stock market videos, it probably means they never built up much wealth via good stock picking skills! By all means feel free to learn from them though if you want to learn about marketing, selling useless courses etc, but not for picking stocks.
If the Vietnam stock market continues upward momentum, I am also expecting companies to come up with overly optimistic presentations to attract strong foreign investment interest. Perhaps forecasts are too strong, measures such as EBITDA are emphasized rather than cash flows, red flags in the accounts are hidden from the company presentations. Sometimes it is better to simply place a lot more focus on the numbers in the accounts of the annual report and information in the notes section.
As brokerage firms in Vietnam increasingly do better from this surge in volumes taking place, we might see expanded coverage in terms of stocks they research. If this trend develops remain wary of the potential conflict of interest. Expect to see them be overly optimistic with the companies under research coverage. They will likely want to remain in their good books to be in the running for lucrative work for them they can do regarding work on capital raisings, bond issuance, M&A etc.
Understanding business in Vietnam – A lot of investors would be quite familiar with Peter Lynch’s book “One Up On Wall Street”. It is a great book for many reasons so perhaps I could have simply made this entire blog post as a link to it! That is not such a bad place to start when it comes to tips for picking stocks in any market in the world.
The book came to mind with in particular with this factor I bring up now of making sure you understand the business in Vietnam. It does place quite a bit of emphasis in thinking about your everyday experiences and observations as starting points in terms of what might be good companies to invest in. If you do that you will naturally gravitate to businesses you actually understand. If your home country is one that is far more developed than Vietnam, you may be in a good position to identify trends that you have already seen that are about to take place in Vietnam. The chances of doing this are even greater if you are spending at least a bit of time on the ground in Vietnam. Developing countries in many ways often follow patterns of more developed economies.
Thinking this way is also consistent with one of my earlier points above about avoiding noise and stock tips from gurus. For good reason, such gurus will usually bombard you with potential 20 bagger stocks and they will typically involve companies with technical terms in industries that are difficult for you to understand. The reason is they want to appear of above intelligence and pretend to have some sort of edge.
Keep it simple and stick to a business you understand.
Of course there are many other factors of note to weigh up when picking stocks in Vietnam, but these are 5 that came to my mind first. Feel free to comment below with other factors we should think about.
Is Vietnam a good investment?
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