HSBC Swaps Vietnam For Sri Lanka
Vietnam has returned 4.2%in local currency terms this year but the rally appears to be losing steam. Meanwhile, Sri Lanka has fallen 6.8% due to concerns over the country’s balance of payment account. Its short-term external debt already exceeds 100% of its GDP.
On April 29, the Sri Lankan government reached an agreement with the IMF for a $1.5 billion three-year Extended Fund Facility. This would give Sri Lanka breathing room to replenish its foreign exchange reserves and to conduct structural reforms such as the tax reform, according to HSBC, which upgraded Sri Lanka and downgraded Vietnam today.
But more importantly, the last time Sri Lanka received help from the IMF, its local stock market rallied big time. Sri Lanka last sought IMF help in 2009 and received the final tranche of a $2.6 billion loan in 2012; its local equity market rose 42% in the following six months. “We expect to see another strong bounce, especially as valuations look reasonable,” wrote HSBC. Sri Lanka trades at 13.6 times historical earnings.
Meanwhile, HSBC thinks Vietnam’s rally has lost steam lately. “Our economist, Izumi Devalier, recently cut her full-year real GDP forecast for 2016 to 6.3% y-o-y from 6.7%, citing government funding constraints which will lower the pace of public investment… Meanwhile, the pace of privatisation of SOEs has been below expectations. The government sold stakes in 422 SOEs over 2011-15, which is 78% below the initial target.”
In addition, Vietnam is no longer cheap. It is trading at 13 times historical earnings, a 7.8% premium to its average since January 2011.
Year-to-date, the VanEck Vectors Vietnam ETF (VNM) has fallen 4.5% and the iShares MSCI Frontier 100 ETF (FM) has gained 0.8%.