Speaker #2: Entering webinar of attendee.
Speaker #3: Environment. I'll give my intro and hand over to you, Tom. Thank you. Good morning and welcome to the VinaCapital Vietnam Opportunity Fund Limited Investor Presentation.
Speaker #3: Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged, and they can be submitted at any time using the Q&A tab situated on the right-hand corner of your screen.
Speaker #3: Simply type in your questions and press send. Before we begin, I would like to submit the following poll, and I would now like to hand you over to Business Development Manager Tom Ha.
Speaker #3: Good afternoon to you.
Speaker #4: Good afternoon from Ho Chi Minh City and welcome to VinaCapital Vietnam Opportunity Fund Annual Results Webinar for the fiscal year ended June 30th, 2026.
Speaker #4: My name is Tom Ha, Business Development Manager at VinaCapital. Thank you all for joining us today. And thanks again to IMC for hosting us again on your platform.
Speaker #4: When investing in a frontier or emerging markets like Vietnam, the story always starts with the macroeconomy. So to begin with, today we'll have Michael Cocolari, our Chief Economist, to provide you an update on the macro situation in Vietnam.
Speaker #4: Followed by Can Vu, the portfolio manager, who will give you a walkthrough on the results as well as the repositioning that has happened over the past 12 months.
Speaker #4: And finally, how is the portfolio positioned to benefit for the next 12 to 24, maybe in three years. And finally, at the end, we'll round off with a Q&A session where Mike, Khan, and myself will sit here and answer your questions.
Speaker #4: So please type in your questions while we have our prepared remarks. Thank you. So now please welcome Michael Cocolari.
Speaker #5: Okay, Tom. Thank you. Oh, sorry. Okay. I'm going to address the elephant in the room right up front. The economy is really strong this year in Vietnam.
Speaker #5: The government's reporting 9% GDP growth, earnings growth could be around 30 this year, and despite that, the stock market is basically flat. So what's going on?
Speaker #5: Well, interest rates in Vietnam, and we look at the 12-month deposit rates. That's kind of the most relevant when you want to talk about the stock market.
Speaker #5: Interest rates are around 8%, , 9%. You can even get 12-month deposit of 10% at some reputable banks right now. I put this dash line on the chart at the 7% level because typically when bank deposit rates get over 7% in Vietnam, this is when people tend to take their money out of the stock market and put it into the bank.
Speaker #5: And the analogous number for the real estate market is around 13%. So mortgage rates are now sort of 13% to 15% for most mortgages.
Speaker #5: And that's the level at which the housing market starts to roll over. House prices are down, call it around 20% from the peak after having had a huge run-up.
Speaker #5: This in a nutshell really explains why despite this really strong economy that the stock market is kind of going sideways. Now, the interesting or ironic.
Speaker #5: Is that what's driving the interest rates up, it's not really an inflation story. Okay, there's a little bit of the oil, you know, story, inflation in Vietnam is, call it around 5% year on year, but really the main factor that's driving the rates up is the really strong economy.
Speaker #5: And also the fact that the infrastructure development in Vietnam has really surged this year. It's up around 50%, 50%. The main factors that are supporting the GDP growth this year, first of all, is the infrastructure spending I just mentioned.
Speaker #5: And also we're having really strong exports of high-tech products, particularly to the US. And that also influences the interest rates because you figure companies that are really, you know, profiting like crazy, you know, selling the high-tech products to the US, they can afford to pay higher interest rates basically.
Speaker #5: So you have a confluence of factors coming together that are driving the rates higher. And then you know, as I said, ironically, this is kind of the main factor that's weighing on the stock market.
Speaker #5: Here's an illustration of what's going on with this high-tech exports that I just mentioned: computer exports, which are not from a small base. This is around 30% of GDP.
Speaker #5: Vietnam's computer and electronics exports up 60%, , 60%. The good news in this is we have enormous amount of FDI planned, FDI coming into the country, into a lot of that is going into the high-tech field.
Speaker #5: So it's all related to this surge in exports, high-tech exports to the US. The other thing that's going on, I mentioned, is, you know, a surge of infrastructure spending.
Speaker #5: The government right now is spending around 6% of GDP on infrastructure. I have that on the previous slide. And the target is to get up to 10% of GDP on infrastructure spending.
Speaker #5: To put that 10% number in context, that's what China and Japan were doing when they were really going intense with infrastructure building, you know, roads, the bullet train in Japan's case, et cetera.
Speaker #5: So that's a really big number. And that kind of leads into the next point, which is how are they going to get all this money to do all these investments?
Speaker #5: Because in addition to infrastructure investment, there's a whole bunch of other, you know, we need residential housing, we need more factories, et cetera. Now part of that money is going to come from FDI.
Speaker #5: We always have FDI, a lot of FDI coming into Vietnam every year. But what we expect and what we see clear signals is that the government looks really like they're about to start opening the floodgates and allowing a lot of US dollar borrowing to come into Vietnam.
Speaker #5: And we know from studying how that played out in other countries in the past that once the government allows like a lot of dollars to come into the country, you get a boom.
Speaker #5: You get a boom that typically lasts kind of five to seven years. And that leads into the next point that I want to talk about, which is that there's a confluence of several different factors that are all lining up at the same time that are going to result in really strong economic growth in Vietnam over the next five plus years.
Speaker #5: So the first one that I just mentioned is this US dollar borrowing phenomenon. Now 1997, you know, Thailand experienced problems because they had borrowed a lot of dollars and they built like golf courses and things like that.
Speaker #5: Well, don't forget that Korea also borrowed a lot of dollars at around the same time. And Korea used that money wisely to build their industrial base and factories.
Speaker #5: So our expectation is that that's going to be how it will play out in Vietnam. They'll use all these borrowed dollars wisely. And irrespective of how it's going to end, the point I really want to emphasize right now is that the pattern is really clear and it's unambiguous.
Speaker #5: When a country embarks on borrowing, so you have all these new dollars coming into the country. We still have the FDI coming every year, but this is a new surge of money coming in that gets spent and invested here.
Speaker #5: So that's, you know, you always get a boom when that happens. So that's one of these three, forces that are all lining up. The other force that's there, which I often talk about, is the demographics.
Speaker #5: Which is kind of like a 10-year type story. And industrialization, which has got like another 15 years to run. So okay, so I just basically talked a little bit about the borrowing, the US dollar borrowing.
Speaker #5: Let me just talk a little bit about these other two so that you can see all these three things that are all lining up at the same time.
Speaker #5: So for the demographics, Vietnam has Vietnam and India are probably the two countries in the world that big countries that kind of matter that have the most positive demographics.
Speaker #5: Vietnam's got about another 10 years of very positive demographics. I use a system that comes from out of the University of Pennsylvania, which is we look at within a person's life cycle when do they tend to spend the most money.
Speaker #5: Their highest earnings, highest spending. And that tends to be around the 45 to 50-year-old type level. So if you take that number of super spenders in a country and you just add it up, it's a really reliable indicator.
Speaker #5: This number peaked, for example, in 1990 in Japan. So it really accurately called the top of the Japanese bubble. Peaked around 2015 in both South Korea and in China.
Speaker #5: So it's a really accurate indicator. So we've got another 10 years to go of really positive demographics. And on the industrialization story, I first want to remind you that Vietnam is doing the East Asian Development Model.
Speaker #5: And this is the only model that's kind of guaranteed, you know, it's worked over and over in Japan. And Taiwan, somewhat in China, they did a kind of a version of this.
Speaker #5: And basically the East Asian Development Model you produce products that you export. The point I want to make here is that right now in Vietnam, manufacturing is 25% of GDP.
Speaker #5: And in all the other Asian tigers, manufacturing peaked at over 30, 30% of GDP. And so that combined with analyzing and studying how industrialization played out in other comparable countries leads us to be very clear that Vietnam has got another 15 years to go for industrialization.
Speaker #5: Part of the East Asian Development Model approach is that you want to produce more and more complicated products over time. So that you have more and more value add.
Speaker #5: And according to Harvard University, Vietnam is the country in the world which improved its ability to make complicated products the most over the last 10 years.
Speaker #5: So we're on the right track with this East Asian Development Model. And now I'm going to introduce a new concept that a lot of people are talking about.
Speaker #5: We just had our annual investor conference and Russell Napier talked about an idea that he calls national capitalism. Some other people call it deglobalization.
Speaker #5: And the idea here is that the world is fragmenting into these different blocks. You know, you've got the US, French shoring block of countries.
Speaker #5: You've got the China BRICS block of countries. Arguably Europe and maybe even Canada are kind of forming their own block of countries. And the key point for Vietnam is that Vietnam sits in the middle of these blocks of countries.
Speaker #5: Vietnam is what the IMF calls a connector country. So the IMF published a very famous report last year and they talked about Vietnam, Mexico, Poland being these connector countries that can trade in between these blocks of countries.
Speaker #5: They're also what Russell Napier would call unaligned countries. Mark Carney gave a very famous speech earlier this year at Davos and he talked about the idea of middle powers.
Speaker #5: These are all kind of related ideas. The key point here is that since Vietnam is friends with everyone, we have this bamboo diplomacy, it's safe to buy things from Vietnam.
Speaker #5: And here's a really good concrete example is that the NHS does not want to buy even refrigerators that are made in China. That was a policy of the NHS already for a bit.
Speaker #5: And then you may know that recently in the news there was an incident, coincidentally, there was an incident in France where many refrigerators were hacked refrigerators are now on the IoT, Internet of Things.
Speaker #5: And so the UK NHS, they don't trust to buy refrigerators from China. They want to buy it from an unaligned neutral source. And it does makes absolutely no sense to reshore the production of things like refrigerators back to the UK and back to the developed world.
Speaker #5: You can see on the slide here it would cost double what it would cost to produce here in Vietnam, for example. So there's that whole bracket of what I call middle complexity products.
Speaker #5: That are going to get made here in Vietnam if you the customer does not want to buy it from China or even from the US.
Speaker #5: There was a story recently that Norway didn't want to buy ships that were made in the US, for example. So unaligned country, able to make middle complexity products.
Speaker #5: So that's going to be, you know, what propels Vietnam's industrialization story for the next 15 years. I will tell you at this point, the topic of tariffs is kind of still in the news.
Speaker #5: There's still some negotiations back and forth about that. This hit Vietnam with harsh tariffs because of this role of being in between. This issue came up a few months ago with the publication of this report from Peter Navarro, who's an official in the Trump administration.
Speaker #5: If you read this report very carefully, you will see that it was a little bit strange because the title of the report was like, you know, it's a scam and on the first page they talk about Vietnam is ripping us off and we should put more tariffs on Vietnam, blah, blah, blah.
Speaker #5: But actually if you really go through and read the report carefully, which we have to because it impacts Vietnam, you find out that most of the report is kind of arguing against the idea that Vietnam is doing anything egregious and it kind of confirms our belief that this is not going to be a big issue because it's not in the interest of the US to put big tariffs on Vietnam.
Speaker #5: I'm going to hop now to another topic to finish out my presentation. So I wanted to present, you know, first of all, give an explanation of this kind of quirky situation with the stock market.
Speaker #5: Like the economy is booming and the stock market's sideways because of the high interest rates. And then talk a little bit about the strong economy now.
Speaker #5: Talk about these, you know, the forces that are all lining up that are going to propel the economy for the next five years. And I want to end on this topic, which is something very near and dear, close to my heart, which is that I see tremendous opportunity in the AI field in Vietnam.
Speaker #5: And I think that this AI is going to have a much bigger impact on both for optimizing the operations of Vietnamese companies and also as an opportunity to be able to do AI development here and you could call it outsourcing.
Speaker #5: It's not really outsourcing. It's more complicated. People use the terminology FTE for deployed engineers, et cetera. But the point I want to make here is Vietnamese have a unique combination of skills.
Speaker #5: They're good in math. They're good in computers. Vietnam is the number five in the international mathematics Olympics. Actually, if you scale it by the population size, it's kind of like number two per capita.
Speaker #5: So really, really strong STEM ability here. And so I always like to get that point in because in addition to those three forces lining up, there's going to be a lot of positive things that happen here with AI that are going to give a lot of investment opportunities and that are going to boost the economy.
Speaker #5: Okay. So that's everything that I wanted to talk about. And now I'm going to turn it over to KV who's going to discuss more specifics about what we're doing with the portfolio and how all that's working.
Speaker #5: Okay. Thank you.
Speaker #1: Thanks, Mike.
Speaker #2: Thank you very much.
Speaker #1: Thanks again, Mike. So for the next part, I want to cover three things. One, the performance from last financial year. Two, the activities that we've made during the portfolio over that period of time.
Speaker #1: And three, importantly, what does the outlook look like? VideoF has been one of the longest running funds investing into Vietnam. We've been doing this since 2003.
Speaker #1: Today, we're a FTSE 250 constituent listed on the main market of the London Stock Exchange. We manage about 935 million US dollars in assets.
Speaker #1: In terms of sterling, just over 700 million sterling. And since inception, we've returned to investors about 11% in dollar terms. Or about 12.3% per annum in sterling terms.
Speaker #1: That's an incredible rate of return that we've been able to achieve over various market cycles. The important part of our strategy is that we're able to invest in listed shares, as well as pre-IPO, privately negotiated, and private equity investments.
Speaker #1: That's important because this gives us access to parts of the market that most ordinary shareholders aren't able to invest in. For the financial year, 2026, the NAV returned 10.5% in US dollar terms.
Speaker #1: That's a solid recovery from the prior year where actually the fund contracted. And importantly, last year's return brings us back to our long-term average of about 11%.
Speaker #1: But I'll be honest about the comparison. The Vietnam index last year returned a lot more. And most of that returned, about 70% came from one group of companies.
Speaker #1: We didn't invest in that company last year. Subsequent to the year, we've initiated a position. And we'll talk a little bit more about that later in the presentation.
Speaker #1: Turning back to the portfolio, you can see that our largest allocation in terms of sector, the financial sector, which makes up about 30% of the portfolio, was the largest contributor to performance last year.
Speaker #1: The second largest sector, real estate, had a mixed year. And you heard Mike earlier talk about some of the challenges facing the sector. That being said, it still was the second largest contributor.
Speaker #1: And then thirdly, the consumer sector has also been a strong contributor to performance this year. Even in light of some of the challenges around the consumer sentiment, we've been able to see good performance in some of our private holdings.
Speaker #1: And that's reflected in valuation lifts, uplifts, or exits from that part of the portfolio. Three quarters of the portfolio's performance was positive last year.
Speaker #1: And our biggest contributors have been some holdings that have been in the portfolio for quite a long time. VinHomes, the largest real estate company in the market, has been in our portfolio for eight years.
Speaker #1: It's a stock that went up 100% last year. And unlike other parts of the real estate sector, VinHomes has been one of the leading performers.
Speaker #1: We've also returned a lot of cash to our shareholders. Last year, we spent about 91 million dollars in the form of buybacks and on top of that, we returned almost 20 million dollars in the form of dividends.
Speaker #1: Those dividends overall, since we've started our return of capital, we've returned almost 900 million dollars to shareholders, almost the size of the fund today.
Speaker #1: And through that period, the NAV continues to grow. The one thing is the discount. The discount has reduced this year but it's only narrowed to around 20%.
Speaker #1: This is an area we need to work on for the upcoming year. Also on top of that, we've talked a bit about the fee reductions.
Speaker #1: So one percent on first billion dollars for the assets currently under management. For the assets currently under management. And that performance fee now is pegged against a five-year average of a benchmark.
Speaker #1: If we're underperform, the fees get clawed back. So turning to the portfolio what do we do last year? We transacted almost 850 million dollars.
Speaker #1: In which 470 million dollars was in the form of divestments and we used 367 million dollars to reinvest. That resulted in a turnover ratio of 39%.
Speaker #1: One of the largest levels that we've seen in recent years. If you recall historically, this portfolio had single digit turnover. This was a deliberate repositioning of the portfolio.
Speaker #1: And we expect going forward that the portfolio will be a lot more nimble. A lot more active. And therefore that turnover ratio will be in that double digits level.
Speaker #1: And the logic is simple. We sold some companies. They were good but they weren't growing. They were slow. We will move that into better placed opportunities where we can see companies growing a lot faster.
Speaker #1: That will translate as we look at our portfolio to some very strong earnings growth. So looking at the actual activities within the portfolio and if we frame it around those four sectors that we talk about, financials, real estate, industrials, consumer, for the financials, we shifted away from some of the defensive names into some of the faster growing banks like MB Bank.
Speaker #1: We also allocated to brokers like SSI as well as Techcom Bank. An IPO opportunity that really is taking advantage of that upgrade in Vietnam's market.
Speaker #1: On the consumer sector, we focused on leaders like Mobile World. Adding to that position. On the real estate sector, we divested some in opportunities but reinvested into real estate developers that have strong land banks.
Speaker #1: We've also restructured some of the legacy holdings in real estate into a listed mark-to-market position. And then turning to the industrials, we heard Mike talk about the huge spending that's going to come into this that will support the economic growth.
Speaker #1: And over the last year, we added one to Gemma Debt which is the leading port operator in the country. And this is a company that's been very resilient.
Speaker #1: After the Trump tariff announcements, whereby actually Vietnam has been a major beneficiary from the resupply chains. Secondly, we added to Gelex Infrastructure. An IPO opportunity that was ran through a limited process.
Speaker #1: We were one of the few foreign investors into this opportunity. And subsequent to investing and listing on the market, this company now is embarking on a significant program of infrastructure.
Speaker #1: So those are certain plays into this infrastructure theme that you heard Mike talked about. And finally, with regards to the valuation adjustments that came through at 30 June, the important thing is that it's a net uplift to some of the holdings.
Speaker #1: Names like Novaland, where last year investors saw a 10 million dollar uplift, continue to be written up by a further 5 million. And this is a reflection of the years that we've spent in the past restructuring where now seeing the benefits by the write-ups and recovery of some of these investments.
Speaker #1: So the takeaway from this section is that it's been a decisive year of repositioning into companies that will benefit from Vietnam's strong earnings growth through sectors like infrastructure, credit, consumer cycles.
Speaker #1: So where are we at today and where are we heading? I think it's important to frame that within how we think about the economy.
Speaker #1: And this is how Mike has expressed it before. That the economy is driven by four key pillars. On one hand, the traditional engines of growth being industrialization and foreign direct investment.
Speaker #1: These are companies that are coming to Vietnam setting up factories. And what we're seeing today is other parts of the economy driving economic growth.
Speaker #1: These are much more relevant to creating the national champions. So sectors like infrastructure development as well as the emerging middle class. These are areas that if you look in our portfolio, every one of the top 10 holdings is a leader within at least one of these sectors.
Speaker #1: So let's turn to our top 10 holdings. Today, the top 10 holdings represent about 58% of the portfolio. Within that, the portfolio earnings growth for this year we expect to be about 30%.
Speaker #1: And for that, we investors get a valuation of around 9.3 times. So a very, very attractive valuation for a very significant level of earnings growth.
Speaker #1: Within our portfolio, we like to think at around those four sector groups that we spoke about earlier. So property, which represent names like Vinhomes, Vingroup, and Cangdian, make up about 30% of the NAV.
Speaker #1: Vinhomes is our top holding. We've held this position for about eight years and today represents first half revenue growth of this year they've posted some significant numbers.
Speaker #1: Revenue is up three and a half times. To about 4.4 billion dollars. And profit is up five times to over 2 billion US dollars.
Speaker #1: In terms of Cangdian, which is another being another long-term holding within the portfolio, they've had a slow recovery given the high interest rate environment.
Speaker #1: But the outlook in terms of the product they're delivering from landed property to now high density apartments and dwellings and the pipeline of project releases over the coming years represents a very attractive entry point today when it's a company a real estate company that's trading at less than one time.
Speaker #1: We mentioned earlier that we initiated a position in Vingroup, which is the parent company of Vinhomes. It's the largest company in Vietnam. And if you think about the performance of the stock market, we mentioned earlier that last year's performance 70% was made up by just this one company.
Speaker #1: We spent several months looking at this company doing the diligence and we're a lot more comfortable today in the outlook and the earnings growth of this business.
Speaker #1: It's moved beyond making just electric cars and taking advantage of the massive program of infrastructure development that you heard Mike talk about earlier. So in terms of their revenue growth for the first half of this year, we've seen it increase 72% to about eight and a half billion dollars about four times that of the same period last year.
Speaker #1: And again, we expect that as these infrastructure projects continue, as the transport orientated development projects begin to take hold, Vingroup I want to be the key beneficiaries of that.
Speaker #1: Turning to consumers, we've also talked about how we've initiated a position in mobile world. Mobile world is Vietnam's leading retailer. And within that business, they have a growing and profitable modern trade grocery store business.
Speaker #1: That was the thesis of our investment. First half revenues we've seen increase about 30% to about 5.6 billion US dollars. And within the grocery train business, we've seen them add about 1,300 new stores to that grocery chain business across the country this year alone.
Speaker #1: Other parts of the consumer business including kiddo which has in the edible oils and cooking oils have had a challenging year last year but this year they look to have a very strong recovery in their profits.
Speaker #1: And finally, within the top 10 is the only private equity holding in a hospital group called Tucup International. They're the leading healthcare hospital in the capital in Hanoi and this year we've seen them expand through opening up some mega clinics since in the last quarter and the team is working with the founders to look at other opportunities where we can grow and expand the clinic network within Tucup.
Speaker #1: We expect profits to recover and that's reflected in the valuation adjustment in Tucup that we've just announced this year. With regards to the banks, we've talked about how we've perhaps trimmed down some of the defensive banks and that's why ACB has no longer the top holding in the portfolio.
Speaker #1: At the same time, we've added to names like MB Bank. And MB Bank has seen their first half pre-tax profits increase by about 30% to about 750 million US dollars.
Speaker #1: The sector itself is trading at a very attractive valuation at around one times price to book. And so is MB. So turning finally to industrials which is the fourth key sector in the portfolio, long terms names like Hua Fat the leading steel company in the country this is a business that continues to grow first half they're talking about doubling profits to about 600 million US dollars and we're looking at a company that's trading at a very attractive six and a half times earnings.
Speaker #1: And finally, if you think about the tariff situation and how actually Vietnam is actually benefited from the supply chain reorganization GEMADEP which is the leading port operator in the country has been a huge beneficiary of that.
Speaker #1: We initiated a position in GEMADEP last year this year they're already announcing about an 80% increase in their full year targets. So what are we looking forward to in the next two years?
Speaker #1: I think the key from this portfolio is the quality of earnings and we're looking at on average earnings growth are between 20 to 25% in 2027.
Speaker #1: And that's off a very high base already in 2026. Names like Vinhomes, Cangdian, Mobile World, Hua Fat as well as new names that we've initiated in the past year names like Vingroup MB Bank and GEMADEP will be strong contributors to earnings growth.
Speaker #1: And so if you think that if markets simply re-rate back to the average in terms of valuations, you're going to see very strong re-ratings and growth from this portfolio.
Speaker #1: So just to wrap it up and bring it all together, you heard earlier Mike talk about an economy that's growing at about nine to ten percent.
Speaker #1: You've got a market that is delivering earnings growth of about 25 to 30%. And yet valuations are effectively pricing for crisis levels. It's a very unique opportunity now we believe for investors to enter Vietnam.
Speaker #1: And Volf is what we believe is a way to enter that given the quality of our portfolio and the activities that we've undertaken over the past 12 months to get to where we are as well as to deliver the growth that we expect in the coming years.
Speaker #1: You're getting a portfolio at a 20% discount makes it a very attractive entry point for investors. We continue to pay that 2% dividend and we continue to return capital in the form of buybacks.
Speaker #1: So as we move now into the Q&A section, I'm going to invite Mike and Tom back onto the stage. And we welcome questions from our audience.
Speaker #2: Happy to question. Please do so in the chat function. There are some questions already have come in. I think first one is to you Mike.
Speaker #2: There's some questions around the US dollar borrowing by the government. Can you talk a little bit about the expectation of the size amount maybe as a factor of how much of public debt the government has at the moment right and how is that has also impact to the effects?
Speaker #3: Okay. So first of all when the dollars are coming in it will when they're coming in it will support the FX rate because the FX reserves will go up etc.
Speaker #3: In terms of the amount couple things to say there. One is that the government's finances are actually in really good shape. If you look at the total government debt to GDP ratio in Vietnam is very low below 50%.
Speaker #3: So the capacity is there to borrow quite a bit. And the I think at some point they'll get the investment grade credit rating that would enable even more capacity.
Speaker #3: In terms of the amount that's harder to put your finger on because it kind of depends a little bit on how things evolve in Thailand in foreign borrowing got excessive to be honest.
Speaker #3: It was around 90% of GDP. So we hope that it won't get to those kind of levels. But that's quite a difficult thing to make a prediction.
Speaker #3: It's a good question. And I'm not trying to dodge the question but that's quite difficult to put the what the amount will actually top out at.
Speaker #3: But what I will say is the capacity to absorb a lot is there. So they could take in a lot it depends on how things how the government sees things kind of laying out I think.
Speaker #3: Yeah.
Speaker #2: Okay. Maybe we'll stick with you Mike just another question on the economy. So if the economy continues to be growing at let's say eight nine ten percent right inflation is continues to be Four or five percent right.
Speaker #2: So that means you probably will have an elevated interest rates. What do we need from the sort of catalyst for the stock market to continue to rise?
Speaker #3: Okay. So first of all and I'm sorry if it wasn't clear in the presentation. The main factor that's keeping interest rates elevated in Vietnam is the fact that the economy is booming.
Speaker #3: And so credit growth has far outstripped deposit growth over the last two years. Last year if you really look at it and like I think the official figures were that credit growth was higher than deposit growth by about four five percentage points.
Speaker #3: But if you look into things like bank guarantees etc the real figure was probably maybe caught around seven percentage points. So the loan to deposit ratio I put on my on the slide that I showed is if you calculate it in a kind of conventional way would be call it around 115%.
Speaker #3: So this is kind of the main thing that's pushing up the interest rates. Inflation of course you know helps to push rates higher but it's not really the main factor.
Speaker #3: Now what I would say is that what we've seen very recently is that the gap between credit growth and deposit growth has shrunk a lot this year.
Speaker #3: It really it's about it's still credit growth is still above deposit growth by about one percentage point. But if you look at another way to look at this which I don't but some other people do and it's a very credible way to look at it is you can calculate what the locally they're calling it the deposit gap in the like how much deposits is the banking system sort of missing.
Speaker #3: And that number which a lot of people track quite carefully has already peaked and started going down. And you may know that in the world of commodities and money is a commodity at the end of the day there's an expression the cure for high prices is high prices.
Speaker #3: And the idea there in this context would be that high interest rates will both dampen credit growth and it will encourage depositors to put money in the bank.
Speaker #3: And so the problem just like in the commodities world kind of eventually solves itself. So my prediction is that the rates will stay high until probably the middle of next year.
Speaker #3: And at that point since high interest rates are the main factor that's weighing on the stock market I think you know hard to time the market but I would imagine that deposit rates coming back down to even the sort of seven to eight percent level compared to where they are right now would be a catalyst for the stock market.
Speaker #3: You know it kind of what's happening and we've talked about this before is that the mismatch between how strong the GDP growth and the earnings growth is versus you know the market just kind of going sideways it's building up like a like almost like a rubber band you know ready to spring back.
Speaker #3: But I think the main catalyst is you need to see deposit rates get back down to the seven to eight percent type level is my guess.
Speaker #3: Yeah.
Speaker #2: Okay. Yeah. I'm sorry just to add to that. You know obviously since the start of this year we've seen those elevated domestic borrowing rates.
Speaker #3: Yeah. And going higher. It's been ticking up all year.
Speaker #2: And what's that's invariably done is you know if. Is down actually.
Speaker #3: But yeah flat is down this year.
Speaker #2: Down is year to date. It you know that money has rotated into bank deposits. And so what we do need is to see those deposit and borrowing rates come down.
Speaker #3: Anything over and I showed it on the chart that I showed I had that dashed line. Anything over the seven seven to eight percent type level that's typically in Vietnam where you see people take the money out of the stock market and put it into the bank.
Speaker #2: Yeah. And the cure for that is obviously we need to have credit to fund this expansion and growth that you talk about. And through perhaps external means and foreign means.
Speaker #2: So that will bring in capital and that will then unlock a lot of that remaining credit that.
Speaker #3: Actually since you're mentioning that I mean I'm so convinced about this US dollar borrowing story because it solves so many problems you know. It solves the high borrowing rate problem.
Speaker #3: It leaves temporarily. It will solve the FX problem. It leaves temporarily strength in the currency. Later we'll see. And they just need the money to do all the infrastructure build out.
Speaker #2: Yeah. So I think one of the questions in here we'll just answer as well is I think you know what is going to drive this market higher we think one of the sort of precursors is expectations that rates will come down in Vietnam.
Speaker #2: And that will then really stimulate you know some key sectors of the market.
Speaker #3: That having been said I'll tell you something a little quirky that we were looking into. Actually what you see in Vietnam is typically the market bottoms and starts going up and then rates go down.
Speaker #3: You know maybe three months later. So you could say maybe it's the anticipation that rates are about to go down.
Speaker #2: That's right. That's right.
Speaker #3: The stock market sniffs it out before it actually happens.
Speaker #2: That's right. And then I think you know obviously we don't have the crystal ball in front of us but the expectation is that this is a 2027 perhaps you know midpoint 2027.
Speaker #3: That's what I think. Other for full disclosure other people like we had the interview with Jens Lautner the Techcombank CEO at our investor conference.
Speaker #3: He said he thinks it will be sort of towards the end of next year before rates start going down. So somewhere between the middle and the end of next year rates should start going down.
Speaker #3: And as I just kind of alluded to you could really see the stock market starting to sniff out that in advance and markets start to recover.
Speaker #3: Especially because the valuation is not a catalyst of course but the valuation is getting kind of extreme now. So.
Speaker #2: Okay. Maybe we can stick with the stock market. This question on IPOs we've seen some activity late last year right and we've participated in some of those.
Speaker #2: Kind of we can talk about what is the pipeline you see IPO coming back again to the market anytime soon?
Speaker #3: Yeah. So I think we mentioned earlier in the portfolio one of the investments we made an IPO you know pre-IPO IPO opportunity was in Techcombank Securities.
Speaker #3: And that was probably the first IPO in the past seven eight years. Right. So there's been a real dearth of opportunities. And then last year we saw several companies come to market.
Speaker #3: And that partly I think was anticipation of several things. One is brokerages felt that they needed to raise capital to capture some of the flows that were coming into the market from domestic and international investors as we were moving towards an EM upgrade.
Speaker #3: And also you know there's just been a huge backlog of companies looking to raise capital. This year I think the first half of this year we've seen very little activity.
Speaker #3: But coming into 2027 I mean certainly from what we're seeing in our team coming across you know there hasn't been a week where we've got someone coming in talking to us about a potential opportunity with the timeline looking to towards the beginning of 2027.
Speaker #3: So in terms of what would need to happen I think that the markets have to have confidence that there is you know that if they do invest into Vietnam valuations are fair.
Speaker #3: And I think that we're at that point. Two the companies that are going to be listing they're going to deliver some very strong growth.
Speaker #3: And again we talked at length today about how you know portfolios like ours going to deliver very strong earnings growth. And I think then that that process will begin to start.
Speaker #3: And then triggered by also things like more inflows through EM upgrades you know that money needs to find opportunities. Actually the way this IPO question is sort of a repeat of the first question because you need the market higher for more IPOs basically.
Speaker #2: Yeah. Okay. There's a question on Vingroup. So we've initiated a position Vingroup post year end in a valuations are still quite high compared to the broad stock market.
Speaker #2: Stock market is trading one to 1.5 standard deviation below the average five year average. Kind of talk us through you know your rationale on why initiating position.
Speaker #3: Yeah. So Vingroup has been an interesting stock to watch. From the sidelines you know as many portfolio managers had last year watching from the sidelines we've seen sort of this astronomical rise in the stock.
Speaker #3: But the fundamentals at least we didn't feel the fundamentals were justified. A year ago we were looking at Vingroup trading about 100 times 90 to 100 times on a price to earnings ratio basis.
Speaker #3: It was you know its net interest coverage was negative. Its debt to equity levels were quite high. And within the business itself they were burdened by effectively a electric car company.
Speaker #3: And earlier this year we got a sense that they were going to restructure and move those operations outside of Vingroup. So that would have alleviated the balance sheet alleviated the leverage and allowed them to have for example one metric a much higher ability to cover their interests.
Speaker #3: That also meant that the valuation steps down. So it is still still rich compared to you know the broader market. But we've seen a material re-rating in valuations.
Speaker #3: And within that as we did our due diligence and I said earlier we spent several months looking at due diligence. We got our team to go out to the sites looking at the real estate looking at the transport orientated developments those five high speed rail and metropolitan rail projects our teams went out to look at those projects to assign some kind of value.
Speaker #3: We looked at the potential accretive value that would come from the land swap through the transport orientated development as well as the margins that Vingroup will have as they build out and construct.
Speaker #3: And from that we were able to form a picture of what this business would look like going forward. You know Gretzky Wayne Gretzky a famous hockey player says you know you don't play to where the puck is you play to where the puck is going.
Speaker #3: And on that basis we felt comfortable that looking ahead Vingroup as one of these national champions was going to be a significant beneficiary of that infrastructure development.
Speaker #3: And to that point we initiated a position. When you think about the size in the portfolio it's just over 5%. And how we frame positions if it's a high conviction position in the portfolio it's between 4 to 6%.
Speaker #3: And that's what we've done. We haven't banked the house on it. You know Vingroup if you think about their weight in terms of index is about 20 25%.
Speaker #3: And as a portfolio manager we would never construct a portfolio to that weighting. So for us it was a company that we were beginning to have a much clearer picture in terms of the earnings outlook.
Speaker #3: Valuations had come down from previous levels. And we had the ability to do diligence on this company that allowed us to put some money in the portfolio to work.
Speaker #2: You know there's you mentioned index and there's question on index here. You know we've changed our fee structure right now. We've introduced a performance reference benchmark.
Speaker #2: How important is the new index in how you construct a portfolio?
Speaker #3: So you know we are a you know historically we haven't been benchmarked but we've been very much benchmark aware. So index aware. Moving forward we felt that to investors having some measure of performance and in this case the FTSE index was a relevant measure.
Speaker #3: Because let's be honest the Vietnam index itself is not investable right. I mean I talked about some instances where you've got you know the Vingroup conglomerate making up over 30% of the index weight.
Speaker #3: You've got real estate and banks just two sectors that represent perhaps you know 50 plus percent of index weight. And yet from a economic story and you've heard what Mike has talked about Vietnam the consumption story is incredibly exciting.
Speaker #3: There's lots of opportunities there. So we felt that picking and finding an index that reflected what is investable. That's first. And then from that expressing how we you know differ from that benchmark.
Speaker #3: So if you think about measures like active share the portfolio that we have today is about 69% active share. Meaning that less than 30% of it reflects what's in the benchmark.
Speaker #3: And the other elements reflect on how we look at companies and select stock. And I think for us you know we are not an index hugging or shadow index hugging.
Speaker #3: And by using a benchmark like the FTSE especially now that they've upgraded Vietnam to emerging markets was actually a very relevant way to for us to measure our long term performance.
Speaker #2: I mean to beat index you have to be different than the index right. And our performance obviously measured over five year period right. Because given the Vietnam's volatility on the market you want to make sure that how we construct portfolio it's for the long term.
Speaker #3: Yeah. Yeah. And I think last year you've seen that significant level of portfolio activity. We talked about that 39% turnover. That is a reflection of us being a lot more agile a lot more you know aware of where growth is coming from.
Speaker #2: Right.
Speaker #3: And you know I think going forward as we measure things like tracking error active share you're going to see that this portfolio does not reflect an index hugging strategy.
Speaker #2: This question here maybe I can take. Is there any. That's not something we have thought about but obviously something we can always do research on.
Speaker #2: If there are any more Canadian investors of course we were happy to explore that opportunity so.
Speaker #3: I think what's important though is that we are imminently going to be printing a US dollar quote alongside the sterling quote that we see and I think that's you know simply a reflection of the London Stock Exchange opening up and giving investors a lot more opportunities.
Speaker #3: But yeah that's you know that's certainly a move forward in terms of how we offer to investors you know broader opportunity set.
Speaker #2: Okay. There's a question here on political risk. Maybe I can open up the broader Mike. What are some risks that you think about and kind of also from portfolio perspective.
Speaker #3: The right way so I worked in Japan for many years and the right way to think about Vietnam's government is it's very analogous to the LDP.
Speaker #3: You know which is essentially a one party system but then there's factions going on inside. I would say the last few years we've had much more definitive leadership than we have in the past.
Speaker #3: And so that's part of this whole what we call the doi moi 2.0 reform agenda. And you see that a lot of things are starting to happen much more quickly now.
Speaker #3: So I don't think in terms of internal there's not really any political risk. What people may want to think about is our neighborhood and everything going on around here.
Speaker #3: And there too I don't think there's any real risk. I mentioned this whole idea that Vietnam is a connector country which is kind of we have the bamboo diplomacy strategy being friends with China and friends with friends with the US.
Speaker #3: But yeah I think that that's the right way to think about it is just think about the LDP in Japan. Basically yeah.
Speaker #2: Actually speaking with the connector countries who is Vietnam sort of competing globally in that space of right. Are we.
Speaker #3: Funny you should ask since you spent time in Poland. It's Poland the ones that are considered the connector countries are Poland Mexico Vietnam and a few others.
Speaker #3: And in this neighborhood we're competing especially for high tech investments Malaysia you know would be an obvious place to go. Thailand maybe for things like manufacturing medical simple medical devices that type of thing.
Speaker #3: Those would be probably the main competitors for for FDI inflows you know.
Speaker #2: Yeah. And to me I think you know if you think about the risk situation you sort of then follow the money right. You know Vietnam's largest export market remains the US.
Speaker #2: The most the country that we import the most from is China.
Speaker #3: Yeah.
Speaker #2: Right. We have seen you know continued FDI which means you know companies coming in setting up factories. I think year to date we've seen an increase 15% increase compared to last year right Mike.
Speaker #2: That for me is how investors manufacture express their risk. If they continue to commit to Vietnam build factories if they continue to buy from Vietnam that is sort of how I say the concerns around risk which which we won't dismiss but how it's expressed in terms of.
Speaker #3: Yeah. It means that they're happy with the domestic political environment and they're happy with the international political environment. And if all those huge FDI Samsung just announced another $5 billion investment you know the way I sometimes tell people is if they're happy with the whole political setup here you know investors should be comfortable with it as well.
Speaker #2: What about from the portfolio construction. What sort of risk that keeps you at night.
Speaker #3: Yeah. I think this so for you know when you think about Vietnam the third is you think about the macro right. So we have to get very comfortable in the direction of macro.
Speaker #3: I think we've we've made it a strong argument for that. And then within the portfolio things that have have we've been talking about the this year interest rate risk right.
Speaker #3: And there are certain sectors within the portfolio that are more sensitive than others to interest rate risk. So understanding as we construct the portfolio how those individual companies then you know what are the sort of the correlation risks that exist to businesses that have you know exposures to to interest rate risk.
Speaker #3: Things like FX less of an issue for us. We very much invest into companies that are either naturally hedged or derive most of their revenues from Vietnam right.
Speaker #3: So and then as we sort of step you know broadly out this year we've been talking about things like inflation and higher oil prices.
Speaker #3: I think that we've seen for example the inflation in Vietnam has had some effect by high oil prices but it hasn't been run away right.
Speaker #3: I mean in terms of inflation might you know this year inflation is running at about 5% which is a little higher than historical average.
Speaker #2: So within the sort of range the government is comfortable with.
Speaker #3: Right. I think they were hoping for 4.5% average the average is right over 4.5% now.
Speaker #2: Yeah. So so for us you know that inflation you know has some impact on the consumer spending but but but it hasn't been sort of as you know negative sentiment.
Speaker #2: So for us when we think about the macro risk then we as we look at the portfolio we really got to understand.
Speaker #3: There's a oil price questions. Kind of lead right into it. So out of the so to be clear it's four and a half percent on the average and then it's like five a bit over 5% year on year was the last print.
Speaker #3: And that 5% is around 3 percentage points of that is the diesel and and and petrol. Of course with diesel you know the crack spread has blown out to like 70 plus.
Speaker #3: So that's had a big impact. Not it's not directly in the basket but it feeds through indirectly to other things like transporting food etc.
Speaker #3: The interesting thing for Vietnam is that and you really saw this when the war broke out earlier in the year is some of the other countries in this neighborhood for the Philippines is probably the biggest most obvious example but with others as well you know they really were concerned about being able to secure enough oil and enough refined products.
Speaker #3: And this is quite an interesting and it links back to the topic of the connector country and the bamboo diplomacy which is that China and to some extent also Korea and believe it or not also Japan help to supply Vietnam with both crude oil and refined products.
Speaker #3: And the reason that they did that is because they have so much factory investment here now that they just see it as in their own interest to make sure that the lights stay on.
Speaker #3: You know remember China was doing a bit of oil diplomacy. They were doling out a bit of you know because for one thing everybody knows now that China's SPR was probably 2.3 billion barrels versus the you know one something billion everyone thought it was.
Speaker #3: So they had a lot more oil to start with. But for the other countries in the neighborhood they were doing a bit of oil diplomacy.
Speaker #3: And here it was more like out of their own genuine interest. So that's one thing to note. Another thing I would say is that in response to this oil question is pre-war oil Vietnam has a we have a we have enough almost enough refining capacity but not enough the the the we need to bring in the heavy oil in particular.
Speaker #3: So we have a net energy deficit before the war was called around 3 to 4% of GDP. And then now with every price gone up that you know you have to recalculate that.
Speaker #3: But that's to give some flavor answer to the to the oil question there.
Speaker #2: Okay. Maybe we have time for one more question. There's a question here from William on initial benefits from the recent FTSE Russell upgrade EM upgrade.
Speaker #3: Yeah. Look I think it's a start and and if you think of how FTSE have framed the the the ascension it's broken to four parts right.
Speaker #3: The first is 10% allocation come June which happened in September just last month. Then in June next in March next year you're going to see 25% further allocation and then in June and September the balance of 35 35% each to give you the the full 100% weighting of that passive flow that's going to come through.
Speaker #3: And again you know if you read some of the sell side reports that size of that path is flow can be anywhere between from one and a half billion to say two and a half three billion US dollars.
Speaker #2: But actually we've seen it in the first round sort of a net outflows right because what has happened is the FTSE Frontier ETFs had to sell out and then you're getting tranches of the EM.
Speaker #3: Yeah. And that's the unintended consequences right. So you you had investors who had perhaps quite a you know significant weight in the Frontier market where Vietnam was something closer to like 30% weight.
Speaker #3: And then you moved to EM where the weight is you know less than a percentage point roughly. So it's a high quality problem to have but it it obviously hasn't been affecting the flows.
Speaker #3: So what we've said you know and and I think we've mentioned this earlier that to take advantage of that investors should think about positioning themselves now not wait until the flows happen and you're competing against the flows.
Speaker #3: And and that's really again in our portfolio we're thinking through about what how how our portfolio reflects the the benchmark and and the and the EM basket you know our portfolio has allocations to names within that but importantly that active share is much higher and we think that as the market re-rates we're going to see a much stronger re-rating across the portfolio.
Speaker #3: And that's going to translate to higher performance.
Speaker #2: Right. Right. Okay. I think we are heading a one hour mark. Maybe any closing comments Mike Kahn? Why why why now?
Speaker #3: I mean I guess I think the most important thing that I said in my presentation today is to explain a little bit the disconnect between very strong earnings growth very strong GDP growth and a flat stock market.
Speaker #3: And it really is it's kind of a quirky situation because the strong economic growth has driven rates higher and the fact that rates higher is the main reason that the stock market is flat.
Speaker #3: It's kind of a quirky situation. And then the other thing is we often talk about this idea that Vietnam's stock market is not really representative of the full economy which makes it's a challenge for the PMs we don't have like telcos are not listed there's not enough consumer companies.
Speaker #2: Yeah.
Speaker #3: So just explain that away.
Speaker #2: And I think just to add to Mike's two points there around you know you know the the macro story is very robust. The the market is has been a problem around liquidity rather than fundamentals.
Speaker #2: And if you see that the the earnings growth is you know is going to deliver some very strong earnings growth the VOF portfolio just to sort of close that off the third point is that the VOF portfolio gives investors a very attractive way to enter the the the market.
Speaker #2: And the activities that we've done in the past 12 months and even longer but particularly in the last 12 months really positioned ourselves to capture that that up you know that the market growth and to capture back some of that performance that our investors have been expecting of us.
