Vietnam equity too hot?

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Hanoi stock exchangeAt first glance, private equity investors’ fascination with Vietnam makes no sense. From a macroeconomic standpoint, the crescent moon sliver of a Southeast Asian nation is a hulking basket case – too unregulated to maneuver without tripping over itself.

Yet, in the fluid reality that global capital markets thrive, Vietnam’s brand of slow restructuring is just the kind of environment speculative investors — wielding so-called “hot money” — draw beelines to, injecting inordinately obese amounts of liquidity despite the sickly temperatures based on all other metrics.

Vietnam has become one of the top private equity darlings in the region. On May 29, it was announced that Warburg Pincus, a New York-based private equity group, would helm a consortium to invest around $325 million in Vietnam’s Vingroup, a conglomerate owned by Vietnam’s richest man and first dollar billionaire, Pham Nhat Vuong. The majority of the investment, some $200 million, Vingroup said in a statement, will be driven into the Vincom Retail property unit.

Now here is the elephant in the room. Real estate provides the most obscure asset to wash money, acting as a capital bolthole. Speculative investments into the property sector are also often led by irrational exuberance that is disconnected from saturation (if it is there yet) and, in Vietnam’s case, an aberration from prevailing concern of macroeconomic fundamentals.

In April, Vietnam reported that the trade deficit ballooned to $1 billion, much wider than expected, while in a report issued on April 29, the IMF revised its growth prediction downward from 5.8 to 5.2 per cent. The country suffers from an over-indebted banking sector and is moving at a snail pace to privatise its clunky state-owned enterprises, which currently crowd out many sectors in the economy and stifle industries by creating a culture based on inadequate communication.

Furthermore, while inflation slowed to 6.61 per cent in April, the IMF report points out that core inflation, which excludes raw food and energy, remains high and limits room for further rate cuts.

The lack of structure in Vietnam hasn’t just been noticed by private equity investors abroad, but also within the ranks of Vietnam’s top businesses. According to Vietnamese government statistics, the majority of Vietnamese US-dollar millionaires have made their fortune on the property market.

The ‘Doi Moi’ reforms that acted as a springboard for Vietnam’s monumental growth continued well into the naughts, with an average 7.3 per cent annual growth being posted since 2000. Yet, in that boom, many relics of the past have been retained.

Land grabs, which at times result in violence, have been nefariously used by the elite to scoop up assets that investors are now making bank on. As Vietnam slowly reforms itself, more sustainable options for investment will have become part of the fold. Keeping the status quo amidst such erratic economic signals can only benefit a few, and for not very long.

 

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Reading Time: 2 minutes

At first glance, private equity investors’ fascination with Vietnam makes no sense. From a macroeconomic standpoint, the crescent moon sliver of a Southeast Asian nation is a hulking basket case – too unregulated to maneuver without tripping over itself.

Reading Time: 2 minutes

Hanoi stock exchangeAt first glance, private equity investors’ fascination with Vietnam makes no sense. From a macroeconomic standpoint, the crescent moon sliver of a Southeast Asian nation is a hulking basket case – too unregulated to maneuver without tripping over itself.

Yet, in the fluid reality that global capital markets thrive, Vietnam’s brand of slow restructuring is just the kind of environment speculative investors — wielding so-called “hot money” — draw beelines to, injecting inordinately obese amounts of liquidity despite the sickly temperatures based on all other metrics.

Vietnam has become one of the top private equity darlings in the region. On May 29, it was announced that Warburg Pincus, a New York-based private equity group, would helm a consortium to invest around $325 million in Vietnam’s Vingroup, a conglomerate owned by Vietnam’s richest man and first dollar billionaire, Pham Nhat Vuong. The majority of the investment, some $200 million, Vingroup said in a statement, will be driven into the Vincom Retail property unit.

Now here is the elephant in the room. Real estate provides the most obscure asset to wash money, acting as a capital bolthole. Speculative investments into the property sector are also often led by irrational exuberance that is disconnected from saturation (if it is there yet) and, in Vietnam’s case, an aberration from prevailing concern of macroeconomic fundamentals.

In April, Vietnam reported that the trade deficit ballooned to $1 billion, much wider than expected, while in a report issued on April 29, the IMF revised its growth prediction downward from 5.8 to 5.2 per cent. The country suffers from an over-indebted banking sector and is moving at a snail pace to privatise its clunky state-owned enterprises, which currently crowd out many sectors in the economy and stifle industries by creating a culture based on inadequate communication.

Furthermore, while inflation slowed to 6.61 per cent in April, the IMF report points out that core inflation, which excludes raw food and energy, remains high and limits room for further rate cuts.

The lack of structure in Vietnam hasn’t just been noticed by private equity investors abroad, but also within the ranks of Vietnam’s top businesses. According to Vietnamese government statistics, the majority of Vietnamese US-dollar millionaires have made their fortune on the property market.

The ‘Doi Moi’ reforms that acted as a springboard for Vietnam’s monumental growth continued well into the naughts, with an average 7.3 per cent annual growth being posted since 2000. Yet, in that boom, many relics of the past have been retained.

Land grabs, which at times result in violence, have been nefariously used by the elite to scoop up assets that investors are now making bank on. As Vietnam slowly reforms itself, more sustainable options for investment will have become part of the fold. Keeping the status quo amidst such erratic economic signals can only benefit a few, and for not very long.

 

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