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VAM: Vietnam Market Analysis May 2011

Interest rates the highlight of the month
With the aim of controlling inflation, the SBV tightened money supply, thereby increasing interest rates. Market interest rates are now averaging 19.86% for short term borrowing, and if including fees (which banks apply to get around the lending rate cap) the effective borrowing costs increased to 23%. On the other hand, the US$ cost of borrowing (approximately 3%) and the rate paid by SOEs is actually negative in real terms, due to a two-tier lending rate. Rates at these prohibitive levels in the private sector threaten to choke off any growth for the year; despite this, another 100 bps interest rate hike for the year is still a possibility.
Following Aprils introduction of USD-denominated deposit cap of 3% for individuals, domestic residents attracted by the large gap between USD and VDN deposit rates, opted to keep fewer dollar deposits, thereby contributing to 2.89% MoM decline in USD-denominated deposits. VND-denominated deposits increased by 1.27%. No slowdown in credit growth, as seen by M2 levels, is yet visible. With credit growth reaching 6.5% year-to-date (as of April), the annual target credit growth rate of 16  18% will likely be overshot. The SBV lifted Open Market Operations repo rates 100 bps to 15%, thus sending a message that tight monetary conditions will remain.
Inflation still very much a concern
Nationwide CPI rose 2.21% MoM (2.1% when seasonally adjusted) with the first five months of 2011 reaching 12.07%. Inflation in May continued to accelerate, approaching levels not seen since 2008 with no signs of easing. Three months into a shift in focus from growth to curbing inflation, monetary authorities have used both fiscal and monetary tools, tightening aggressively, yet little impact is invisible. Seasonally adjusted food prices were up 3% MoM in May, following a 3.8% increase in April. Prices in food and energy related items were most noticeably up, however, it should be noted that this was aided by double digit hikes in electricity and fuel prices in late February and later March. It is likely that inflation will surpass 20% in the coming months and further monetary tightening is to be expected.
Stability in the dong continues
Stability in the VND/USD exchange rate continued into the month of May. With the dong appreciating about 0.43% over the previous month, banks appear to have sufficient USD dollar supplies to meet importers needs. Although exact figures are difficult to come by, recent media reports have quoted a government minister as saying that reserves stood at $10bn (the equivalent to about 6 weeks of imports) in December 2010. Towards the end of May, the central bank announced that it has purchased USD 1.2bn with the aim of increasing international reserves. In this quest, the SBV outbid the market by 40  50 dong, to VND 20,600 per USD, indicating it exercises caution while added to reserves by striving to avoid furthering inflation through increased liquidity. 
Domestic indicators continued to show positive signals
Domestic indicators such as growth in exports and imports both continued to show increases for the month however, growth came at a decreasing pace than in April. Exports and imports, increased at 5.7% and 2.7% respectively for May. While Mays trade deficit came to US$1.7bn, the highest in 18 months, the drop in commodity export growth rates was a contributing factor. Domestic consumption remains strong with industrial production expanding by 14.4% YoY and retail sales growing by 23.7% YoY, FDI, overseas remittances and aid money remain important sources of exchange for Vietnam to offset its trade deficit. FDI figures for the first 5 months of the year totaled $4.7bn, or about 23.5% of the years target.
Equity markets 
Starting the month after a long holiday weekend, the VN-Index opened at 483.3 points and ended the month at 421.37, representing a 12.23% loss MoM. The VN-Index even plummeted to 386.36 points on 23 May 2011, its lowest level since 2009. May also saw dramatic downward trend in trading volume anda squeeze on liquidity on both bourses. Trading values for both bourses fell for yet another month, dropping to $27 million in May, down from $62 million and $42 million in March and April, respectively.
The massive sell-off from retail and even institutional investors resulted from investors low confidence which in turn was caused by the upward revision of inflation forecast and “persistently high interest rate”. Moreover, news about the banks deadline to reduce real-estate and non production loans to below 20% of total loans also ignited fears of margin calls and forced selling to recover bad debts on the banks part, leading to a 10 consecutive bear sessions on the market in spite of a strong rebound after hitting the record 2 year low bottom. Further contributing to downward pressure was many investors needing to meet margin calls by liquidating holdings at limit down prices in a period of low liquidity. The trading band further fueled negative sentiment by preventing the market from finding its true equilibrium.
Rounding out the month, the market saw an upturn with several large caps closing limit up. Many investors are abstaining from the market, choosing instead bank fixed term deposits as high bank interest rates provide a profitable, safe alternative.
To better reflect the true sentiment in the market, a senior official has called for the introduction of new indices. While the composition of the indices is yet to be determined, suggestions range from top 30 or top 50 large-market cap companies or dividing the market into business sectors. The poor equity market performance shows macroeconomic factors continue to impede recovery and outlook remains bearish.
Our ViewWe believe the market will continue to fluctuate within the wider range of the trading band in the short-term as investors key concerns, namely double-digit inflation and trade deficit are still prevalent. Economic recovery seems a distant prospect, and investors prefer the high fixed deposit rate to equity at this time. However, in term of valuations, we think Vietnamese equities are currently priced more cheaply than those of other regional markets.
In response to poor market sentiment, the Ministry of Finance recently announced their support to recover the equity market by allowing (1) investors to use more than one brokers; and (2) buying and selling the same securities within a trading day provided that investors securities for sales are available in their depository accounts, with effect from 1st August 2011. This news is considered good catalyst to regain the capital inflow into the system despite the current market instability. For investors with a medium- to long-term outlook, the current poor market is a great opportunity to increase their equity holdings at cheap valuations.  We maintain our picks of telecommunication, consumers and energy sectors with focus on strong fundamental resilient companies with little or no debts as most companies in the other industries are struggling hard with the high-interest rate environment.
Source:VAM, 14.06.2011

Filed under: News, Risk Management, Vietnam, , , , , , , , ,

VAM: Vietnam Market Analysis July/Agust 2010

Market Update – This month Fitch downgraded Vietnams debt rating to B+ with a stable outlook from BB- citing inconsistent government policy, low foreign exchange reserves and a weak banking system. The move came as a surprise to many commentators who looked at Vietnams ever improving macro condition as reason for optimism. We also share this opinion, as the move was somewhat unjustified and does not reflect the efforts of the government in stabilizing the macro environment and the countrys currently improving key macroeconomic indicators. VAM_Monthly_Newsletter_Jul_2010

In July, industrial production and retail sales were up 13.5% and 26.4% year on year respectively. Although year to date up 17.5% when comparing to the same period last year, export turnover this month declined 8.8% MoM as subdued European demand made its impact which contributed to Julys monthly trade deficit of $1.15bn or $7.4bn year to date, equivalent to 19.4% of export turnover. However, capital inflows can adequately compensate the deficit with FDI disbursement being recorded at $6.4bn year to date and overseas remittances showing an increase of 24.5% year on year in the 1H 2010, achieving $3,9bn. It should also be noted that ODA flows and external borrowings have not yet been taken into account.

Foreign reserves are expected to increase by $2bn to $17bn by the end of this year. Credit growth for the first 7 months was 12.97% highlighting the importance of recent reductions in bank lending rates in realizing the governments effort to achieve its target of 25% for the year. Continued low inflation has also given the government room to increase the money supply in order to push lending rates lower.
The VN-Index continued its sideways path during the month as mixed second quarter earnings failed to support a change in stagnant retail sentiment. However, the downgrade did prompt net buying from foreign investors to decline towards the end of the month. The VN-Index closed the month at 493.91 or a decrease of 2.61% MoM.

Our View – By end of July, most corporates have disclosed their 2Q 2010 earnings results which have been quite mixed with consumer sector looking good while property and materials sectors seeming weak. Despite first half year business results being in line with expectations and macro economy experiencing positive signals in the month, they were not supporting enough to drive the bourses upwards as investors remained skeptical about new capital flows injected into economy via credit growth policies.

For August, we expect the markets movement to be mainly driven by factors such as selling pressure, investors confidence and a break-through in easing monetary policies of the State Bank of Vietnam (SBV). Concerns on the oversupply of shares in the market (particularly from banks in order to meet the minimum charter capital requirements) will also create a lot of pressures on the VN-Index.  As the market has followed a bearish trend recently, specific and comprehensive actions from the SBV via credit growth policies will be an important catalyst in bringing back investors confidence.

Currently, we still uphold our interests in telecommunication, oil & petrochemical, dairy product, pharmaceuticals and banks.  Moreover, we will be continually keeping an eye on news on the global economy and monthly government meetings to closely observe the trend of macro and monetary policies in the near term.
Source: VAM, 08.08.2010

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Energy: Don’t Believe Long-Term Oil Forecasts

On 4 October 2009, The Wall Street Journal ran an article World Need for Oil Expected to Ease (subscription might be required), where the author, Spencer Swartz, wrote:

The International Energy Agency next week will make a “substantial” downward revision to its long-term forecast for global oil demand, a person familiar with the matter said, marking the second year running the group has slashed its view of the world’s thirst for oil.

If demand pessimists are correct, future increases in the price of crude could be damped as weaker consumption stretches world oil supply by billions of barrels. Various analyst estimates maintain that the roughly 2% a year average growth rate in world oil consumption seen earlier this decade — the biggest reason for crude prices hitting a record $147 a barrel last year — may turn out to be an anomaly and that annual growth in the neighborhood of 0.5% to 1% is more the norm.

The reality is that no one knows what the long term future holds. The IEA itself struggles with the Bull versus Bear oil outlook. Ask yourself, how many pundits foresaw the mess we are in now and anticipated the dramatic easing of oil demand?

Sure, one can gather relevant information and make a reasonable guess as to oil demand next year and the year after that. But after five years, the potential paths of demand growth become unwieldy. How will economic growth be sustained over the next five years? Will the OECD countries lag emerging countries? Will China and the rest of Asia power ahead and create substantial demand? If Asian countries do power ahead and create many millions of middle class citizens, will they demand their own vehicles and tickets on jet planes to see the world? Will Brazil and other South American countries enjoy strong economic growth? Will the Middle East be stable over this period? Will Iraq resume its full production capabilities? As you see, one can begin asking any number of questions that are impossible to answer with an accuracy or certainty and that might have a major bearing on demand or supply or both.

What do we know? We know that for a long time, oil prices were usually within $20-$30 real per barrel. Now those prices are laughable. No reasonable person expects the world to return to those prices any time soon. Many major oil fields around the world are in decline. Oil companies are searching in more remote and sometimes more unfriendly regions of the world to develop further existing fields and to discover new fields. And, the rise of oil prices has given new prominence to some national oil companies. A sample list, though incomplete, of companies include: Gazprom OAO (OGZPY.PK), Petróleos de Venezuela, S.A., and Petróleo Brasileiro S.A. – Petrobras (PBR).

If we were to accept the 1% annual growth of oil demand mentioned in the WSJ quote for a long duration, what would that mean or imply? A child born tomorrow will see by her seventieth birthday a doubling of daily world oil production from about 85 million barrels per day to 170 million barrels per day. Moreover, during her seventy years, the world will have produced more during that time than the total cumulative amount prior to her birth. Call me a skeptic, but I am unable to see where we would find that much additional oil to produce at such high rates for such a sustained period.

To be clear, neither the article nor the IEA is suggesting that we endure a 1% growth forever. Rather, I wanted to use this seemingly small innocuous number of only 1% growth to draw attention to its implication. If the long term growth were 2%, then in 35 years the daily world oil production would double to 170 million barrels per day and the oil produced during those 35 years would exceed the prior total cumulative amount of oil produced.

I recommend two excellent sources of information to learn more about oil, oil demand, oil prices and various policy initiatives:

  • Statistical Review of World Energy from BP p.l.c. (BP). I found the link to the Adobe pdf document toward to the bottom on its homepage.
  • Monthly Oil Market Report from the International Energy Agency. The link is to the webpage that hosts the document that is released two weeks after the initial release date. Subscribers receive immediate access through a different link.

Both documents are extremely helpful. I find the BP document provides concise information and historical context. The IEA document provides the agency’s latest thinking and forecasts.

As the world struggles to find new sources of oil, there will be dramatic changes. I have already discussed some questions we should ask ourselves as we contemplate future oil demand growth. Of course, many more questions need to be considered. And I have indicated that some national oil companies have gained strength and prominence with higher oil demand and prices. As investors, we should also think about what long term oil demand growth means for oil sands companies such as Suncor Energy, Inc. (SU) and Canadian Oil Sands Trust (COSWF.PK), and for large multinationals such as ConocoPhillips Company (COP), Chevron Corporation (CVX), and Exxon Mobil Corporation (XOM).

As demand continues to rise, I am curious what will happen. Will scientific breakthroughs help? How will the world cope with the environmental consequences? How will people adapt to possibly much higher prices? How will countries and regions change because of either having or lacking domestic oil supplies? If the world does experience higher prices, what are the implications for global world trade? And do higher prices imply that people will travel less and have less of an understanding of other regions? These questions are just a small sample of what investors should begin considering.

A few years ago, Professor Bartlett gave a compelling lecture, captured in a series of YouTube videos, to some students at the University of Colorado. In his lecture, he discussed oil demand growth. The lecture starts a bit slow; however, when you reach the latter part of the third video, you’ll see how the prior information is relevant to his discussion on oil. In other words, because they are important, don’t skip the initial video segments and jump to the third. I urge you to watch the complete video series.

And after you’ve watched the videos, ask yourself, “What time is it?” This question will make sense once you’ve seen the videos.

When I initially saw the WSJ article, I was drawn by the long term forecasts. My personal bias is that most longer term things in life are difficult, if not impossible, to forecast with any reasonable degree of accuracy. Then as I read the article, I saw the 1% growth number, which by itself seems very innocuous. But if you think about what 1% growth means over a long and sustained period, you quickly realize there are going to be changes. Moreover, the world has already witnessed a significant shift in oil prices over the last decade. We are no longer in our prior historical norm of $20-$30 per barrel. Some might argue that we are now in unchartered territory. As part of that possible unchartered territory, I wanted you to think about some larger questions. The questions mentioned in this article are just off the top of my head without much thought. I am sure you can think of many more. And last, I wanted to draw your attention to Professor Bartlett’s excellent lecture. His lecture will make you think about oil demand (and others) growth differently. I hope this article causes you to further your own research.

Source: Seeking Alpha, 08.11.2009

Filed under: Brazil, China, Energy & Environment, Mexico, News, Risk Management, Venezuela, Vietnam, , , , , , , , , , ,

VAM: Vietnam Monthly Market Analysis October 2009

Market Update – Economically, Vietnam continued to show it is in the midst of a v-shaped recovery in October.  Through the first 10 months of 2009 compared to the same period last year, industrial production is up 7%, retail sales are up 18%, and exports are showing some signs of improvement now down only 13.8%.  Inflation remains in check at 3% YoY in October.  Furthermore, foreign direct investment commitments were roughly US$6 billion in October, the best month this year and bringing total commitments for 2009 up to roughly US$19 billion. VAM_Monthly_Newsletter_Oct_2009

Credit growth year to date in Vietnam stands at 33% through the end of October, well over the full year target of 30%.  The National Assembly has been deliberating during the month on, among other things, whether to extend a second stimulus package.  Concerns that excessive credit growth may re-stoke inflation and also lead to deteriorating bank balance sheets are delaying the announcement of the potential second stimulus package.  However, continuing the interest rate subsidy portion of the original stimulus package has been approved, albeit with theoretically more stringent restrictions to avoid improper usage.

During October, the official USD/VND exchange rate reached over VND 17,000 for the first time. The State Bank of Vietnam announced the USD/VND average exchange rate on the interbank market on 10th October 2009 was VND 17,001. This is the record high, resulting from continuous slight increases of VND 2  3 from the beginning of September. At the end of the month, the black market VND/USD exchange rate spiked up to as much as 18,600 VND/USD by some accounts.

The stock market had an up-and-down month, finishing up just 1.1% at 587.12 after having dropped to as low as 549 and increased to as high as 624.1 at some points during the month.  However, the month end sentiment was bearish.  Potential reasons for the month end correction include, i) Vietnams financial markets aligning with poor global sentiment, ii) perceived drained liquidity through tougher application of the interest rate subsidy program.

Third quarter results have come out for most listed companies by end of October. Generally the results are good and many companies have achieved 80% of their earning targets for the year. Sectors which have done well are real estate, construction materials (including plastics, steel, cement) and ports. The property market has warmed up after a lack-luster 1H09 and transactions are being busily reported, especially in Northern Vietnam market. This has got some real estate companies revise up their earning targets for the year quite significantly. The port operators are still enjoying good earnings, with port fees increasing 10-15% this year, due to lack of supply.

The Food & Beverage sector continued to be steady with most companies on track to achieve their full-year earnings targets; some will also have extraordinary income from sources such as asset revaluation and financial investments. However, some may face slower sales in 4Q due to cold weather in the North (e.g. beverage), while some others may benefit from Vietnamese habbit of stocking up food for Lunar New Year (e.g. confectionery). Seafood exporters reported mixed results, with the industry leaders performing well and smaller players suffering from high cost inventory and lost markets. Pharmaceutical sector is inline although no breakthrough is expected. Auto components also did well but next quarters may be more difficult due to higher material costs.

Banks had a tough quarter as NIM dropped around 20% QoQ amidst increasing competition for funding. Insurance companies are still making losses from core business and furthermore hit by losses from bond investments in the rising yield environment. Shipping companies have done slightly better in 3Q09 compared to 1H09 but the outlook is still rather bleak as shipping rates are expected to improve only toward end 2010.

Our View – We think that the market has passed its initial recovery stage where most stocks enjoyed price appreciation. Going forward, the market will be more selective and biased toward companies with good earnings potential based on the current and near-term economic outlook. In the medium and long term, we continue to be bullish on the markets recovery and certain stocks with strong fundamentals will continue to outperform.
Source: Vietnam Asset Management, 06.11.2009


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Venezuela announces joint oil venture with Vietnam

President Hugo Chavez’s government says it is forming a joint oil company with Vietnam to exploit Venezuela’s heavy crude.

State-run Petroleos de Venezuela SA, or PDVSA, will cooperate with Vietnam’s state oil and gas monopoly, PetroVietnam, on oil exploration and production in Venezuela, according to a presidential decree in the Official Gazette issued Friday.  The company, to be called PetroMacareo SA, will operate in Venezuela’s eastern Orinoco River basin, and may also participate in transporting and selling oil, the decree said.  Under Venezuelan law, PDVSA’s partners may hold only a minority stake in oil production projects.

During a visit from Vietnamese President Nguyen Minh Triet in November, the two leaders discussed the possibility of building an oil refinery in Vietnam, and of cooperating with the Asian nation to build oil tankers. Chavez’s government has been forming joint oil ventures with allies ranging from Russia to China as Venezuela aims to diversify its oil clientele.

The United States remains the top buyer of oil from Venezuela, which is the fourth-largest oil supplier to the US.

Source: Forbes, 25.05.2009  click here for original article

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