Focusing solely on the here and now, it is hard to get excited by the Market Vectors Vietnam ETF. (VNM). With emerging markets equities popping this year, VNM, the lone exchange-traded fund dedicated to Vietnamese stocks is lagging with a loss of 2.5 percent.
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Frontier Vs. Emerging Economy
While Vietnam is officially classified as a frontier market, not an emerging economy, VNM is still lagging the iShares MSCI Frontier 100 ETF (FM). FM, which has been pressured by lower oil prices over the past two years, is up 1 percent this year. Lower oil prices should not be much of hindrance to Vietnamese stocks because Vietnam is not a major oil exporter.
Are Positives Ahead?
For the three years ending 2015, VNM only outperformed FM on one occasion, 2014, but the Vietnam ETF could be poised to end that skid. At the very least, tactical investors looking for single-country, satellite-type exposure should be rewarded with VNM in the coming years. Vietnam is the tenth-largest country weight in FM at 3.6 percent.
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Although five-year plans coming from emerging markets usually only garner attention if said plan arrives courtesy of China, investors mulling VNM should look at the details of Hanoi's most recently unveiled five-year plan. One of the most important details being targeted GDP growth of 6.5 percent to 7 percent through 2020.
This would represent an acceleration of growth from the previous five-year period (5.9 percent average), but given that the global economic environment was challenging in 2012 and 2013 such stronger growth could be achievable if supported by an improved global environment, as was the case in 2015 when a 6.7 percent expansion was recorded.
This positive outlook is of course reliant on global conditions remaining stable or improving, any global downturn over the next five years would clearly knock the target off course. Another reason for optimism is that the Trans-Pacific Partnership (TPP) trade agreement should be brought into force within the five-year period, and is expected to be a real benefit for the Vietnamese economy, said Markit in a recent note.
Policymakers And Financials
Vietnamese policymakers are also targeting significant growth of the country's industry and services sectors, which could be a boon for VNM going forward. Like many single-country emerging or frontier markets, VNM features a massive financial services weight, in this case 45.3 percent. However, VNM also sports solid consumer exposure with the staples and discretionary sectors combining for 23.5 percent of the ETF's weight.
Investors should note that VNM's 31 holdings have a weighted average market value of $1 billion and none of the ETF's holdings are considered large-caps. With a price-to-earnings ratio of just below nine, VNM trades a discount to major developed, emerging and frontier markets benchmarks.
Hanoi is also targeting a state budget deficit of just 4 percent by 2020.
Success in achieving this target will depend to some extent on global economic conditions and the effect they have on the Vietnamese economy. Should conditions be relatively benign the target looks reachable. The target has only been breached four times in the past 15 years, but these include 2013 and 2014 (the latest available data) and so some improvement will be needed to reduce the deficit by the end of the decade, added Markit.
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