Reverse Capitulation For Vietnam ETF?

The definition of capitulation is the scenario under which investors give up on riskier investments to move to more benign fare, usually doing so in "panic selling" fashion. If there is such a thing as "reverse capitulation," or giving up on the punishment of particular stock or ETF to embrace it from the long side, the Market Vectors Vietnam ETF (NYSE:VNM) might be seeing that scenario play out.

Shares of the controversial fund are higher by one percent today on volume that is already more than a third higher than the daily average. In what amounts to a stealth rally, VNM has surged 4.4 percent this week. Over the past month, VNM has gained five percent, bouncing back (sort of) from months of losses.

In May, the lone ETF exclusively devoted to the Southeast Asian economy was trading just over $21. By late November, VNM was flirting with $15, a stunning reversal of fortune for a fund that was one of the top-performing ETFs of any kind in the first quarter.

A brief summary of VNM's wild 2012 ride goes like this: The ETF was bid higher earlier this year, taking part and leading to some extent, a broader rally in emerging markets funds. Investors were enchanted by VNM even after a precipitous 2011 fall for the fund for two reasons.

First, Vietnam's expected economic was forecast to be at least on par with, if not better than, much of the developing world. Second, it appeared policymakers in Hanoi had finally gotten a handle on inflation, the biggest stumbling faced by the Vietnamese economy over the past several years.

Then came the notion that Vietnamese equities were cheap relative to other developing nations. Add to that, it was reported in the second quarter that Vietnamese Vietnamese banks were sitting on copious amounts of excess cash, good news for VNM, which is heavily allocated to financial services names.

That ebullience would die a harsh death following news of the arrest of two noteworthy Vietnamese banking scions, headlines that dealt a blow to investor confidence in the country's banking system.

Now, global investors have concerns about the amount of bad loans Vietnamese banks must contend with. Earlier this week, the World Bank said Vietname lacks clarity on the depth of its bank sector woes. That is not good news for an ETF that allocates almost 45 percent of its weight to financial services names.

In what some investors may view as a quixotic response to the World Bank report, VNM has traded higher in each of the three U.S. trading sessions since the report was released. One reason for VNM's move higher could be an HSBC report released on the same day as the World Bank's. HSBC said Vietnamese policymakers made the right decision to focus on macroeconomic issues rather than growth.

As such Vietnam's PMI reading pushed above 50 last month and inflation was tolerable at 7.1 percent, down from 18.6 percent a year ago, HSBC noted.

On the other hand, Vietnam's bank woes are expected to have stifled credit growth this year and the country may be forced to package the bad debts and sell the debt to foreign investors, according to Saigon Daily.

If those debt sales do happen, it would like be at a high yield. Vietnam's sovereign debt is rated BB- by Standard & Poor's, putting the country in the same class as Nigeria and Serbia.

Bottom line: The Vietnamese investment thesis is near-term fractured, long-term appealing. For this week at least, the bulls appear to be wining. How long that lasts is up for debate.

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