Market views & Insights in Q1/2008

Following the 140% rise of the VN Index in 2006, the market went into a corrective mode in 2007, which began towards the end of March. Although the market is down significantly from its peak, we are not too concerned. GDP growth is still expected to be strong and as such, still continues to underpin our positive view on the Vietnam market. There are currently short-term macroeconomic concerns, most notably inflation and the ballooning trade deficit. It is our view though, that the government will be able to address these short-term macro concerns and maintain its long term growth path. As such, we continue to believe that the prospects for the Vietnamese stock market continue to remain bright.

Stock Markets in Q1/2008

Vietnam’s stock markets continued to face some rough seas in the first quarter of the year. The key VN Index lost 481 points (-48.2%), almost half of its value while Hanoi also tracked the weakness of the VN Index as it lost 141 points (–43.89%). As a result, we have seen Vietnam’s market capitalization shrink by 77% to only USD 13.85 billion, from USD 24.57 billion beginning of the year.

Key reasons for the market’s weakness included short term macroeconomic concerns, most notably of which is the country’s inflation figure, which edged closer to 20% by the end of March. Liquidity was also tightened during the quarter in an effort to reign in inflation, further pushing market sentiment to the negative side.

Some measures were taken by government to help stem the slide in the markets. By end January, the Ministry of Finance (MoF) said it would allow foreign investors to buy auctioned shares in foreign currencies. The State Capital Investment Corporation (SCIC) will be allowed to buy certain stocks in the market to stem its fall.

Towards the end of the quarter, the State Securities Commission (SSC) narrowed trading bands. The HOSE and HASTC bands moved to +/-2% from +/-5% and +/-3% from +/-10%, respectively. Although markets moved higher, the new measure caused liquidity to dry up. Daily turnover dropped to an average of US$10 Million per day during that week.

Key economic releases for the quarter

GDP grows 7.4%.

Vietnam’s GDP growth rate grew by an estimated 7.4% in the first quarter this year, lower than 7.7% rate in Q1 last year due to higher oil prices, natural disasters?????, a global economic slowdown, and depreciation of the U.S. dollar.

Q1 Trade Deficit quadruples to US$7.5 billion.

Vietnam is forecast to incur a record high trade deficit of $7.5 billion in the first quarter of this year, up 4.38 times year on-year. The country's export value is estimated to increase by 21% to $13 billion in the first three months, accounting for 22.15% of the year's target, said the Ministry of Industry and Trade. On average, Vietnam earned only $4.33 billion from exports monthly, far behind the set goal of $5 billion; meanwhile, the country reported a record increase in import spending of $20.5 billion in the quarter, up 68.7% on-year. With the increasing trend of import spending and low growth rate of exports partly triggered by the US dollar  devaluation, the ministry has raised its forecast for Vietnam’s trade deficit to over $20 billion from $16.97 billion this year.

Vietnam attracts over US$5.4 Billion FDI in Q1, +31% year on year.

Vietnam is estimated to have pulled in a total of $5.43 billion in foreign direct investment (FDI) in the first three months of this year, representing a y/y rise of 31%, according to the Ministry of Planning and Investment (MPI). The MPI said up to $4.6 billion, or 89.9%, of the total FDI, came to the service sector, with the real estate and hotel business accounting for much of that. The industrial sector accounted for just 10% of the FDI and the rest was invested into the agro-forestry-fisheries area.

Investment activities for the quarter

For the quarter, the VNIndex was down -44.25% from 927.02 to 516.85 points. On a comparative basic, MAFPF1’s NAV moved lower, declining by 30.08% to VND 6,575 from VND 9,404.Since our launch date, the VN Index has lost 52.22% of its value then of 1,081.63 points  compared to a decline in the MAFPF1 – of 34.25%.

Given the weak outlook for the banking sector, we have purposely reduced our holdings in  banks. We continue to maintain our underweight stance on property as well. Given the tightness in liquidity, it is our view that property companies will also have a challenging year ahead.

We have added positions in sectors that we think will be earnings defensive in nature given the volatile environment that we face in the short term. Our key overweights now are Oil and Gas and the Utilities sectors.

Given the volatility in the market, we have been cautious in making our investments in the market, especially in the equitization and the IPO markets.

As market conditions improve, we would most likely reduce our cash holdings. The fund still has more than 20% of the cash that we have raised in the initial fund raising exercise last October – putting us in a very good position to deploy this cash into the market, conditions permitting.

In addition to monitoring the events that unfold in the market and the general macro-environment, we are currently reviewing our current investments and looking out for new investments as companies are now in the process of reviewing their performance for the 4th quarter 2007 and the fiscal year 2007.