Investors Bet on Vietnam Even as Valuations Top Southeast Asia

Vietnam stocks are pricier than their Southeast Asian peers for the first time in two years -- and they are about to become more expensive.

"There is room to grow,” said Dominic Scriven, Ho Chi Minh City-based Chairman at Dragon Capital. "We are looking for 19 percent net growth for earnings next year,” as the economy expands and inflation remains stable, he said.

The benchmark VN Index is trading 15.9 times earnings, compared with the MSCI South East Asia Index which is at 14.7. A 15 percent gain in the VN Index has led to its outperformance versus the MSCI Frontier Markets Index and the South East Asia benchmark gauge. The gauge rose 0.2 percent at close on Tuesday.

The market’s "valuation is expected to continue rising in 2017,” because of upcoming listings of attractive companies, said Le Nguyet Anh, head of research at ACB Securities JSC. "Meanwhile, for the currently listed stocks, decent earnings growth will be the major price growth momentum.”

The strong premium this year is "due to its good macroeconomic performance and political stability, while the rest of the region went through political transformations and tougher economic times,” said Attila Vajda, managing director at Project Asia Research and Consulting Pte in Ho Chi Minh City. Philippine President Rodrigo Duterte, elected earlier this year, has unnerved investors with his frequent outbursts against the U.S. and violent war on drugs. Thailand experienced deadly street clashes before an army coup in 2014.

Economists predict Vietnam will be among the world’s fastest-growing economies in 2016 as it benefits from a manufacturing industry that has grown in importance over the years. Increased foreign-direct investment helped push the VN Index to an eight-year high of 688.89 on Oct. 19. The government aims for GDP growth of 6.7 percent next year, which will be the fastest pace since 2007. Profit at companies on the benchmark gauge are projected to grow 23 percent in the next 12 months, according to data compiled by Bloomberg.

The market still faces the "hurdle of liquidity,” said Andy Ho, VinaCapital’s Chief Investment Officer. He recommends the government lift the foreign ownership limit in the banking sector as one way to boost the market liquidity. Last year, Vietnam allowed some industries to raise the foreign ownership limit to 100 percent from 49 percent, however, the cap for the banking sector still remains at 30 percent.

Vietnam, which would have been the biggest beneficiary of the Trans-Pacific Partnership, may stand to lose the most as President-elect Trump prepares to quit the pact. "Since Vietnam’s economy is export driven and the U.S. is a significant export market, it is likely that we need to see how the incoming Trump administration will finally deal with trade barriers,” said Vajda.

The average daily turnover on the Ho Chi Minh City Stock Exchange - the main bourse - is just $109 million this year, compared with $768 million in Singapore, according to data compiled by Bloomberg.

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