Good morning, Vietnam! In the month of January Vietnamese equities soared by nearly 24%, beating the next best ETP by a full 9% out of the gate. In the European ETP market, Vietnamese equities are extremely underrepresented with only one ETF, the db X-trackers FTSE Vietnam ETF (XVTD), offering exposure. Vietnamese equities were supported by a host of factors including an influx of foreign direct investment, expectations for a rebound in GDP growth and recent success at reining in excessive inflation.
Vietnam first began to sow the seeds of economic growth in 1986 with efforts to encourage the development of private businesses and foreign investment. The liberalisation of Vietnam's foreign trade policy continued into the current century as the country signed a bilateral trade agreement with the US in 2000 and officially joined the WTO in 2007.
Inflows of foreign capital and private enterprise formation have helped Vietnam slowly transition from a centrally-planned agrarian economy to a more viable, export-oriented economy. Undoubtedly, these policies, amongst others, were instrumental in spurring the last 25 years of economic growth, culminating in a stable 6%-8% GDP growth rate since 2002. In recent years, however, Vietnam's GDP growth has been trending downwards, faltering from a three-year peak of 6.8% in 2010 to 5.9% in 2011. In 2012, the State Bank of Vietnam saw growth deteriorate further to 5.1%-- the slowest pace in 13 years. That said, widespread market expectations are pointing to Vietnam’s GDP growth picking back up in 2013 in the region of 5.5%-6.0%.
Further contributing to the bullish atmosphere has been Vietnam’s recent success at reining in excessive inflation. Currently, inflation is down to 7.01%, off its peak of 23% as recently as August 2011. However, longer-term investors may not want to throw caution to the wind as the inconsistency of Vietnamese monetary policy in dealing with inflation may be cause for concern.
In February 2011, Vietnam unveiled Resolution 11, which was aimed at fighting inflation and supporting its currency with contractionary monetary and fiscal policies. Following the announcement, the State Bank of Vietnam incrementally raised rates to eventually reach 15% by July 2011 from the previous 7% at the start of November 2010. Inexplicably, after July 2011 Vietnam began to cut rates. The IMF and economists criticised the Vietnamese government for making confusing and contradictory statements about the direction of rates. Following these criticisms, Vietnam responded by raising the benchmark refinancing rate back up to 15% by the end of 2011, before instituting another series of interest rate cuts in 2012. In December, Vietnam implemented their sixth interest rate cut of 2012 bringing the key lending rate to 9% at the time of writing.
Investors, therefore, should be cautious when considering Vietnamese equities as economists suggest that Vietnam's central bank is quickly losing credibility with its unpredictable rate decisions.
Away from Vietnam and at the other end of the performance spectrum, volatility continues to ebb amidst renewed confidence and a bullish atmosphere. During the month of January, volatility-related ETP products in Europe lost between 12%-35%. Much of the downturn in volatility can likely be attributed to the US averting the worst consequences of the fiscal cliff, thus allowing the market rally to continue. In general, stock market volatility tends to spike in the face of declining share prices.
Volatility is commonly modelled by the VIX index, which seeks to capture changes in expected future volatility. Expected volatility, thus, serves as a proxy for market uncertainty, affording the VIX Index the moniker of "The Fear Index". When investors are fearful and uncertain, they will demand higher expected returns and thus pay less for assets in the present. This relationship between volatility and share prices can make vehicles that follow the VIX good diversifiers for equity-based portfolios.
Some assets, like commodities and government bonds, show near-zero correlations to stocks, but volatility has a strong negative correlation with stock prices. Unfortunately, volatility is also strongly mean-reverting and as such will theoretically produce zero long-term return.
VIX products have proliferated across Europe’s exchanges as investors have begun to be ever mindful of risk’s role in a portfolio. Some of the most common European ETPs offering volatility exposure, in terms of assets under management, are the Source Nomura Voltage Mid-Term ETF (VOLT) and the Lyxor ETF S&P 500 VIX Futures Enhanced Roll (LVIX).
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