Asian Diary - February 2015

VIETNAM

At the start of the month, several of us from the Asian offices joined Oliver Bell, Portfolio Manager, and his frontier markets team, along with our Asian sovereign analyst, on a two city trip to Vietnam. GDP per capita in Vietnam is low by Asian standards – roughly in line with India and half the level of places like Indonesia or the Philippines - but what strikes the first time visitor is that, in contrast to many cities in these other emerging Asian markets, the basic necessities of life have been taken care of by the communist government. There are no slums, housing is of reasonable quality, and sanitation seems much better than in many parts of Asia. The next thing that strikes you is the traffic – passenger vehicle sales rose nearly 40% YoY in 2014.

Vietnam is emerging from a credit boom and bust of its own making, and the legacy of that is a non performing loan (NPL) problem. Whilst policy is moving slowly to clean it up, none of the banks we met seemed willing to deviate from the official, excessively low estimate of NPLs. That being said, it is also evident that the real estate market in the country is picking up again. The hope is that this will help deleverage the system as many loans were backed by real estate. We met the Deputy Governor of the State Bank of Vietnam and the Deputy Minister of Finance. Both were keen to highlight the government’s greater focus on stability - with inflation targeting and conservative credit growth. You get the sense that if they could clean up the NPLs and loosen the controls on credit growth, the economy would have the potential to grow well ahead of the 6% expected over the next couple of years. Foreign direct investment into Vietnam was another growth driver frequently mentioned during our meetings. Vietnam has been a beneficiary of the trend for incremental manufacturing capex to move out of China. The oft-cited example is Samsung Electronics, which has spent billions of dollars in Vietnam in recent years, attracted by government incentives, and now ships 40% of its mobile handsets from the country.

Consumption has been the main area of disappointment as a growth driver recently. Longer term, with a very young population of 90m people, consumer-oriented companies have the potential to be one of the more attractive areas of the stock market. We met with several real estate developers and pharmaceutical companies, which are all interesting plays on this theme. For equity investors, the key problem in Vietnam is a lack of available stock. Most of the attractive plays are at, or close to, their foreign ownership limits so it is incredibly hard to source liquidity in the more favoured stocks. The Ministry of Finance was keen to highlight their intention to speed up the state owned enterprise IPO and privatisation process. They also intend to raise the foreign ownership limits across a range of sectors. Such moves would be very welcome and would certainly encourage more foreign participation.

INDIA

Later in the month, our Financials team spent a few days off the beaten track visiting villages in rural Northern India. In Uttar Pradesh and Rajasthan, where the team travelled, the rural population is still 63-66% of total population. Paved roads and clean water are lacking. Electricity might only be available for 8 hours a day. Some typical scenes from their trip…

As well as seeing the problems faced by people on the ground in rural India, the purpose of the trip was to better understand the state of rural banking, which is a key initiative for many of the private sector banks that we own there.

Rural India enjoyed strong consumption growth under the previous government, with farmers supported by schemes to guarantee minimum support prices for produce during the 6-9 months crop season, and the National Rural Employment Guarantee Act which provided a guarantee of 100 days’ work at $2.50/day during the off-season. Multiple layers of bureaucracy and parochial local politicians have caused these systems to be abused, however, and corruption is rife. Feedback from people the team spoke with on the tour suggested that things are getting tougher under the new Modi government. There is scepticism, however, on the ground about how much real change Modi’s reforms will be able to make to lives of rural Indians in the near term.

As for the banks themselves, this is the type of bank the team found in villages in rural India…

The bad news the team discovered is that rural bank branches are giving low income farmers with low financial literacy easy access to money, creating poor, indebted people without the means to pay off their loans. From an investment perspective, however, it’s only really the public sector banks participating in this segment. The private sector banks where we invest have more stringent underwriting standards, while they also tend to be located in small cities, or the suburbs, and far less in village outposts.

So, the overall conclusion from the trip is that rural India may be in a tougher place than over the last few years. This will have little impact on overall GDP growth however, as agriculture is just 15% of GDP. The private banks are well positioned in India. In rural areas they are focused on growing deposits rather than lending, but elsewhere loan growth to retail and corporate remains solid in an improving economic environment.

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