As a broader sector it has of course been one of the top two stars over the past four years – a total turnaround from a decade earlier when they were the dogs of the asset class list – but as the phrase goes “every dog has its day”, and so did this one, Vietnam.
It has been one of the markets that seemed for some reason to have attracted much more interest than others. Whether it was because of its troubled twentieth century history, or because of its odd blend of “capitalist-lite” communism, it has drawn a lot of interest and funds from many investors, both private and institutional. The appropriately named Ho Chi Minh Index blazed a trail (sorry) upwards to a peak in 2007, following which its performance has become more of a trial. In fact the Index has seemed to fall virtually every day throughout May and for most of the first part of June.
From the start of the year the losses have been dramatic and it has now fallen by 60% during that time. Vietnam is now the world’s worst performing market - for the time being.
However, what is happening in Vietnam is symptomatic of the woes of other nations in the region. Other countries are also struggling to keep a lid on bursting inflation, such as Indonesia and Malaysia. These fast developing nations have had now quite a number of years of good growth, but at the cost of rising prices. These conditions then have been further exacerbated by the soaring cost of energy, especially oil and food.
For Vietnam this been a particular issue with inflation recently touching 25% last May. Contrast this with the twenty largest emerging economies where inflation had risen at an average of 6.9% - still higher than 4.9% from the previous year but nowhere near the Vietnamese problem. Action is now finally being taken and maybe the authorities might be able to regain control of this unruly dragon. The economy has been overheating as a result of excessive demand and encouraged further through stoking from the state and its related quasi-owned enterprises, but now action is being ordered and interest rates have been rising.
A firm policy of monetary tightening has been imposed (not a normal activity for many communist regimes) as the State Bank of Vietnam raised rates from 12% to 14% - its second rise in the past month.
One can only hope that this is successful, but the issues of energy and food inflation are showing signs of becoming embedded into some of these economies. If this continues, that is not just bad news for them but also bad news for us closer to home as any goods we import from such areas will carry the larvae of inflation into our weakened Sterling economy. Just what the Governor of the Bank of England does not want to see.
The effect on the Vietnamese currency, the wonderfully named “Dong” (presumably without a luminous nose) has also been interesting. Since March there has been a modest rise in the currency against the US$ despite the fact that interbank rates have risen from 4.5% to 10.25% in the same period – without which the Dong might just have gone ding.
The pressures of overheating are a concern elsewhere and the decision by the Chinese to raise pump prices by up to 18% is an encouraging sign. This is the first hike in eight months and seemingly the largest one-off to date. Such rises won’t be popular when they come in on the 1st July and coupled to rising food costs could likely cause further “social pressure” amongst the majority of China’s poorer population. Just what the authorities don’t want to see in the run up to the Olympic Games.
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Perhaps I should also take this opportunity to update you on something I have mentioned before – the weakness and impact of falling Icelandic Krona. Now I appreciate that this currency is unlikely to be at the top of the concern list for most. This delightful little island has sadly found itself at the mercies of others investing, or rather speculating, on its value. The Krona has fallen to a record low against the Euro and a five year low even against the US$!
The concerns are still around its banks and their highly leveraged loan books and liabilities. The credit default swaps which provide a measure for the risk of holding such bonds have broadened out to their widest since March, and effectively double what they were a month ago. Still care needed here.
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And finally………worrying signs of our financial plight when it comes to things naval. Two of our warships would have some significant problems defending themselves if they came under attack. It seems that two of our finest vessels, Type 42 destroyers HMS Exeter and HMS Southampton, have had their missiles removed since Christmas in order to save money.
Streuth – I suppose we will take the lids off our submarines next. I hope no-one tells the enemy.
Have a good weekend,
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited