A tale of two cities: Ho Chi Minh City vs Cairo

Investing in frontier markets provides for a huge cross section in opportunities as market dynamics differ significantly. From the currency-frozen markets of Zimbabwe to the mature markets of Eastern Europe, there is something for everyone. Of course, the key to making returns in these markets is all about what you pay.

As far as frontier market go, Vietnam is a pleasure to visit. The visa process is a breeze and as you land there is a steamed bun fight of hawkers trying to sell you cheap mobile cards, currency and transfers – pretty much whatever you might need and more. Everything works, without having to pay excessively for it. Hotels are superb, the food quality is incredible and for R10 you can jump on the back of an Uber scooter and zip through the craziness to whatever awaits. 

We visited Vietnam in March to meet with a number of companies. It is an economy on the rise, growing at 7% per annum and with much going for it. It is a decent-sized market with close to 100 million people with a wonderful work ethic and a ’can-do’ attitude. Still, in the Coronation Global Frontiers Strategy, we have zero exposure to Vietnam.

WHAT GIVES?

The current optimism towards Vietnam has seen very large capital flows into the country. It is a market with a healthy 18% of MSCI Frontiers Index weighting and managers of both Frontier and Global Emerging Market assets have been enthusiastic supporters. 

However, the Vietnamese stock exchange is quirky. Trades have to be prefunded. A number of companies have foreign owner limits, which means stocks trade at two price points – one level between domestic buyers and another, much higher level, between foreign buyers. The foreign transactions are opaque and the regular market bid-offer transparency is not there. 

A large number of listings have recently come to market, to great support. We have battled to find value and have resisted the temptation to buy into the momentum. An extreme example of the value dislocation is the coming to market of the largest cable operator, VTV: a 48% stake is being offered at 260 times 2016 earnings and 20 times its book value. As yet, there are no 2017 numbers out. The fact that something like this can even be brought to market screams warning signs. 

So we left Ho Chi Minh city empty-handed following our trip. The story is great. The opportunity set is far less so.

SO WHERE DO WE SEE VALUE?

An interesting exercise is to compare Vietnam to Egypt.  

Both countries have populations close to 100 million people and their respective GDPs per capita are almost identical, at $2 482 and $2 492 respectively for Vietnam and Egypt. While it is treacherous to use read-across metrics such as market capitalisation to GDP, it is interesting that the Vietnamese total market capitalisation weighs in at $154 billion while that of Egypt is only $42 billion. Ratings in Vietnam are far higher, at an average of 21 times earnings, with the more interesting stocks trading at further premiums of as much as 50% due to foreign ownership levels. We would argue that the earnings base is also much higher in Vietnam, given the more stable multiyear growth history. Egypt trades on an average multiple of 15 times earnings, with the earnings base below normal given its recent history.

This quarter, we met with a number of Egyptian companies. We are still managing to find high quality businesses on single multiples. And this is in an economy where inflation and interest rates have recently spiked and are now coming down quickly. Interest rates were cut 200 basis points this quarter, with expectations of further cuts in the months ahead. Inflation is likely to hit single-digit figures this year from having hit 30% in 2017. 

Most of the businesses we talked to spoke of an improving trading environment. Economic reforms of the last couple of years are starting to yield results and the outlook for Egypt to experience growth over the next few years is good. However, due to previous hard years, many of these businesses have earnings well below our estimate of normal. So despite the strong stock market performance in Egypt, there are still companies trading below their intrinsic value.

While we hold no Vietnamese exposure today, we hold maximum positions in Egypt in both our African Frontiers Strategy and our Global Frontiers Strategy. This is as a direct result of specific high conviction stock positions that stack up to give the overall exposure weighting.

I remember a conversation with a potential investor who was looking at Africa in 2014, when the markets had run hard. He said, “Give me a call when things are on single earnings multiples”. After the torrid 2015 and 2016, I did just that and gave him a call. “Oh no, I can’t invest in Africa! There’s just so much bad news,” he said. And that is the thing – most investors want the kind of deal that the UK is looking for in Brexit – divorce where you get to keep all the brilliant children, and pass on the delinquents. High-growth markets and single-digit multiples seldom go together. We think we might have found one in Egypt.

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