On a day when many riskier assets were punished by lingering uncertainty over the U.S. fiscal cliff, it was not surprising to see Market Vectors Vietnam ETF (NYSE:VNM), itself a risky asset, gave back some of its recent gains on Thursday.
Despite a 0.81 percent drop for VNM on Thursday, the ETF is up 13.3 percent in the past month. However, some good news regarding Vietnam's banking sector was overlooked amid all the fiscal cliff jitters yesterday.
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The decline in U.S. equities meant news of Vietnam's largest ever banking sector acquisition went unnoticed. Unbeknownst to many American traders, Japan's Mitsubishi UFJ, that country's largest bank, announced a $743 million deal to acquire 20 percent of Vietnam Joint Stock Commercial Bank for Industry and Trade, or VietinBank.
The State Bank of Vietnam will still be the majority shareholder in Vietnam JSC, but news of foreign interest in its banking sector comes at a pivotal time for Vietnam and investors with an interest in the Southeast Asian nation. Investors should note that VNM does not hold shares of Vietnam JSC, but its largest holding is JSC Bank. These are two separate entities.
VNM allocates 19.3 percent of its weight to bank stocks. Add in real estate firms, diversified financials and insurance providers, and VNM's weight to the financial services sector jumps to almost 45 percent, according to Market Vectors data. It was that sector exposure that punished VNM earlier this year.
Following news of the arrest of two noteworthy Vietnamese banking scions, investor confidence in Vietnamese banks suffered. As if that was not bad enough, the World Bank would later voice concern about Vietnam's problem with bad loans.
In September, Moody's lowered Vietnam's credit rating to B1 from B2, citing weaknesses in the banking system, The Australian reported. It has been those type of headlines that weighed on VNM and rattled investor confidence even though Vietnamese banks are well-funded and sitting on ample cash.
While the Mitsubishi UFJ deal with Vietnam JSC is just one transaction, and not even an outright takeover at that, it does bolster the case for near-term upside for VNM. The ETF had already been putting in a fine performance over the past month, but a foreign buyer stepping into the Vietnamese banking market at a time when risk appears high could be construed as a positive sign for the country, the sector and the ETF.
Additionally, the Mitsubishi/Vietnam JSC deal shows foreign investors that Hanoi is open for business. Foreign direct investment in Vietnam fell 15.3 percent this year to just over $13 billion, prompting Prime Minister Nguyen Tan Dung to push for more progressive policies aimed at enticing foreign investors to Vietnam.
The development of a debt asset management company to resolve bad bank debt coupled with even a tinge of banking sector mergers and acquisition activity could be the tonic VNM needs to stage another first-quarter rally in 2013.
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