It is around 20 months now since the Vietnam stock market bottomed out in late March of 2020 after the covid-19 “crash”. I used the word crash loosely as the Vietnam market actually fell less than many developed markets at the time. We are talking circa 30% in a couple of months, although the market suffered a decline of more than 40% from an earlier peak in 2018. Handling such falls should be the price of admission when investing in frontier stock markets, seen more as a correction if you like.
Having said that Vietnam experienced a genuine stock market crash around 2008 that was not for the faint hearted. How would you handle your portfolio dropping more than 75% in the space of a couple of years?
Without being alarmist, Vietnam stocks have rallied so hard since March 2020 the moves don’t look all that dissimilar to the run up seen into 2007.
Is it different this time?
At the risk of saying the four most dangerous words in investing, this time is different.
I think, or hope.
But after such a massive run up it is worth reminding ourselves that even a 40-50% fall from here would only take us back to where we were in a little bit over a year ago. Investors in frontier stock markets should at least be prepared for such volatility.
After all, those who bought into the Vietnam stock market near the lows of late March 2020 should have likely doubled their money just going by what the VN-Index has done. Many active fund managers however have performed a lot better.
ANOTHER VIETNAM STOCK MARKET CRASH, IS IT DIFFERENT THIS TIME?
To get some more background on why I thought it was worth asking this question in late 2021, the following two previous blog posts might offer some perspective.
HISTORY OF THE VIETNAM STOCK MARKET
For the history of the Vietnam stock market, and what played a role in the crash in 2008 you can refer to below.
best global stock market returns 2021
Now might be an appropriate time to ask ourselves this question, given the Vietnam stock market was one of the star performers in the world in the first 10 months of 2021.
VIETNAM STOCK MARKET CHART – THE CRASH OF 2008
The last Vietnam stock market crash was not for the faint hearted!
The highly sophisticated graphics on the below chart perhaps highlight the extent of the fall!
REASONS WHY A VIETNAM STOCK MARKET CRASH IS UNLIKELY
- Lack of interest still from offshore institutional money.
- Inflation and interest rate stability.
- Better bank lending practices driven from scars of 2008.
- Strong current account surplus.
- Stock market valuations not expensive.
- No significant overbuild in property markets.
Lack of interest still from offshore institutional money – In 2020, and at least the first 8 months of 2021 as the Vietnam stock market has been booming, foreign investors have been net sellers.
Many regard that a signal for caution is when a frontier or emerging market is hot due to surging inflows from foreign investors. So far in this latest Vietnam stock market boom we have seen the opposite. The year or two prior to the 2008 crash was very different however, with foreign money a key driver in extending the boom at that time.
Inflation and interest rate stability – I say this with a bit of caution, as I do see future risks of this dynamic. However one can’t ignore the fact that due to lower inflation, local Vietnam investors don’t have as good an option nowadays in terms of earning a decent rate on their bank deposits. This is very different to circa 2008, where you would earn at least twice as much back then.
Better bank lending practices driven from scars of 2008 – Huge lending growth occurred around this time and unsurprisingly we saw a lot of bad debts amongst banks and SOEs. The government as a result committed to a lot of reform in that area. This should be still relatively fresh in the minds of major participants in the economy so in theory that should put them in a better place not to repeat the mistakes of the past.
Strong current account surplus – Financial instability in Vietnam was worsened due to their deteriorating current account situation at the time of the last Vietnam stock market crash. There was a lot of “hot money” flowing into the country which saw strong imports. This time however Vietnam has come a long way with their export story which helps underpin a sounder economic footing for the country.
Stock market valuations not expensive – P/E ratios of the VN-Index got to crazy levels like 30 times or more prior to the last Vietnam stock market crash. They are probably around half the level these days, and still cheaper to 2018 when the Vietnam market had a strong run. They also look favourable compared to the likes of Thailand, Indonesia, Philippines and India.
No significant overbuild in property markets – The reckless lending I mentioned just above from banks also saw cheap money flowing through to property developers, and helped fuel speculation in property as well as the stock market. This made the whole fallout even worse. This time there still could be a risk that property markets have held up too well thus far into the pandemic as money could be regarded as cheap. A difference in this cycle however is the disruption to supply caused, thus reducing the risk of a supply boom led crash.
REASONS FOR A VIETNAM STOCK MARKET CRASH
- Retail investors boom a signal for a top?
- Global inflation risks.
- Geopolitical tension.
- Investors doubling their money since March 2020 (and maybe a lot more) tempted to exit?
- Covid-19 risks.
Retail investors boom a signal for a top? – Most of us are familiar with the stock market tale of what to do when the shoeshine boy boys or taxi drivers are giving you stock tips?
Well perhaps this applies to the Vietnam stock market, the huge growth in new investors is a concern. I covered this in the flowing blog post if you are interested..
Although the growth in new stockbroking accounts has been huge, we should note that we are still talking about less than 4% of the population with an account. Hopefully I return to Vietnam within a month or two. For the reason that such a small number of people have stockbroking accounts, I don’t expect my driver to be giving me stock tips just yet anyway.
Global inflation risks – This factor concerns me the most heading into 2021, although it is also a key risk for any equity market across the globe. Arguably the risk is greater for markets that are more highly priced than Vietnam’s to begin with. Having said that if inflation risks scare investors across the globe, I am sure the Vietnam market will also take a hit.
Geopolitical tension – I’ll try to avoid offending anyone with various political views here, but I am sure most can agree there is no shortage at the moment of risks to discuss in the world in this regard.
Investors doubling their money since March 2020 (and maybe a lot more) tempted to exit? – This reason is self-descriptive, but one that in my opinion can cause a sharp correction but not so likely a crash.
Covid-19 risks – This one we are all well aware of I am sure. At least the news the last few months, generally speaking, is not looking as scary as it was in the middle of the year.
PROS AND CONS OF BEING INVESTED IN THE VIETNAM STOCK MARKET IN 2022
You could probably tell where I stand on this from the tone I used above in discussing some of the risks versus reasons why now is quite different from the last Vietnam stock market crash in 2008. I think the reasons I discussed why a Vietnam stock market crash could occur are more likely genuine catalysts for a correction. In a frontier stock market like Vietnam’s a 30-40% pullback I view as just a minor blip for a long-term investor. This might occur in the backdrop of other global developed markets having a correction of 20% or so.
Whilst I hate using these words, dare I say it I think the situation of the Vietnam stock market is different this time, in the context of drawing comparison to the risks that were evident there in 2007.
As discussed in recent blog posts, I am a shareholder in the VinaCapital Vietnam Opportunity Fund. To read more about my experiment tracking the performance of that and other Vietnam related exposures in my portfolio, check out the following link:
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