The excuse to rationalise many relatively expensive global equity market valuations of late has been that bonds as an alternative asset class are even more unattractive.
For that reason, I thought that I would take a closer look in this post at an overview of the Vietnam bond market. This can perhaps give us a better perspective whether Vietnam stock market valuations are justified.
I would point out that the decline in Vietnam government bond yields is not the only factor that can justify current Vietnam stock market valuations.
Having said that though, I would argue that this thematic has been one of the most important drivers to high returns to Vietnam stock market investors over the 18 months or so. I touched on this in a recent blog post below:
VEITNAM STOCK MARKET VALUATIONS IN 2022
Heading into 2022, Vietnam stock market valuations look reasonably fair across a number of different metrics.
ARE VIETNAM STOCK MARKET VALUATIONS CHEAP? – VIETNAM STOCK MARKET (vietnamesestockmarket.com)
HISTORY OF THE VIETNAM GOVERNMENT BOND MARKET
| Year | Event |
|---|---|
| 2000 | At the time of the Vietnam equity market beginning, Vietnam’s government bonds are very limited, less than 5% of GDP. |
| 2009 | System in place for Vietnam government bond trading to operate on Hanoi Stock exchange. |
| 2012 | Electronic trading platform for Vietnam government bonds integration with Hanoi Stock Exchange. |
| 2015 | Vietnam starts to issue very long term government bonds such as 20 year and 30 year maturities. |
| 2019 | Launch of government bond futures contract. |
VIETNAM GOVERNMENT BOND MARKET YIELDS
Below shows a recent snapshot of the Vietnam government bond market yield curve.
Source: investing.com
The shape of the curves are not too dissimilar from other global bond markets, i.e. Relatively normal to steep. This may reflect the environment that we are in with the stage of potential recovery from covid-19 that should eventually take place. Central banks across the world want to ensure a huge amount of liquidity is available as we deal with this once in a lifetime type event.
In theory at least, beyond the next couple of years things should more normalize and perhaps interest rates do the same.
The Vietnam government bond yield curve does however look a bit steeper from the 5-10 yrs. area compared to say that of the US.
Another point I would note on the above chart is how you can see yields are generally lower than 12 months ago. Such an environment has provided a positive backdrop for the Vietnam stock market.
Putting the above yield curve chart in the context of real rates (taking into account inflation rates), well you could make an argument that Vietnam’s 10-year government bond yield offers a positive real return. By that I mean some reports suggest Vietnam’s latest inflation prints may be less than 2% year on year. However I would take that with a grain of salt in that Vietnam has gone through many months of strict lockdown this year and it may not be such a normal inflation read.
Still, many other longer dated government bonds on the world clearly offer negative real returns as inflation pressures have been building.
VIETNAM GOVERNMENT DEBT AS PERCENTAGE OF GDP
Below is a chart of the decade trend of Vietnam government debt as a percentage of GDP.
Source: ceicdata.com
It has trended high over the last decade but feel free to comment on this post of countries where government debt has NOT trended higher. Probably not a lot in that camp.
In terms of where Vietnam sits today the RHS of the below graphic shows where G20 nations are roughly likely sitting this year. As a rule of thumb above 50%, and even above 100% is pretty normal these days, so there doesn’t appear any major concerns with the trends in Vietnam in recent years.
In fact in recent years the Vietnam government debt situation has looked ok. Perhaps that is a sign that the upward trend from 2011-2016, reflected in part some relatively efficient use of debt by the government at that time.
VIETNAM GOVERNMENT BOND MARKET MATUIRTY DATE PROFILE
As discussed in the history table earlier, the Vietnam government bond market took a long time to evolve in terms of establishing longer dated debt. I noted there that it took until 2015 to even start longer term bond issuance to any great extent such as issuance in the 20-30 year parts of the curve.
The below chart is a few years old, but one can observe how after 2015 over the next few years the percentage of longer bond issuance was increasing substantially.
Whereas around 2010-2015 despite Vietnam increasing their government debt substantially, tapping the longer end of the bond market was not so much of an option then.
The chart above does show greater than 10 yr. debt maturities was used around 2003 but we must bear in mind at that stage government debt as a percentage of GDP was tiny. In that respect the chart doesn’t tell us much about those early years.
Things have evolved a lot thought since 2018 where the above chart finishes.
Now that the longer dated maturities are available for the Vietnam government bond market to issue into that is what they are focused on in the 2020s. Nowadays a large percentage of new issuance is focused on long term government debt, so I would expect the look of the above chart to already be a lot different. A much higher percentage of bond outstandings to be greater than 10 years maturities.
TRADING / LIQUIDITY / OWNERSHIP OF VIETNAM GOVERNMENT BONDS
One positive aspect regarding the Vietnam government bond market is over the last 5 years they have become less reliant on external debt. Not only has the size of the government debt burden stabilised after an increasing trend from 2010-2016, the amount they borrow externally is clearly falling over the last 5 years. It makes up the minority as a funding source whereas the opposite was the case in some years after the fallout of the 2008 financial crisis. This is a healthy trend.
In terms of who owns the debt historically it has been a mix of commercial banks and non-banks such as pension / insurance funds. The latter has been increasing over the last 5 years and the trend to longer term debt issuance has been meeting this demand.
Improving liquidity for such bond holders remains an important goal in Vietnam. Continued improvements in technology and infrastructure with the Hanoi Stock Exchange in that regard should continue to help.
DOES VIETNAM HAVE CORPORATE BONDS?
Yes and expect this to continue to grow in the future. I shall discuss this more in a blog post at a later date. When I get around to it though I shall provide a link here for future reference.
Link now below:
VIETNAM REAL ESTATE?
When thinking about investing in the stock market of any country, it is useful to consider alternative asset classes such as the bond market and real estate market. To learn a bit more about the latter you can refer to the below previous blog post of mine.
CAN A FOREIGNER BUY REAL ESTATE IN VIETNAM?
Some may be surprised to learn how in 2015 Vietnam took some key steps to make it easier for foreigners to buy Vietnam real-estate.
CAN A FOREIGNER BUY REAL ESTATE IN VIETNAM? – VIETNAM STOCK MARKET (vietnamesestockmarket.com)
Is Vietnam a good investment?
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