Investing Can Partially Replace Banking
Investing may no longer be exclusively for the most affluent population and investment bankers, but rather for individuals wishing to revolt against FX losses, and even negative interest rates that are present when utilizing the services of banks in some countries. At its current state, the banking system in many ways fails its customers, and will eventually encourage them to seek superior alternatives. The flurry of global FX losses found should be considered a high risk for those banking, similar to a failed investment, and investment in frontier and emerging Asia should be viewed as less riskier alternative.
Sentiment for banks has certainly become darker this year, as seen by the strong sell for a large number of banks:
- A large number of banks have been experiencing strong sell offs, most particularly during the beginning of this year.
- To top this off, the trend of negative interest rates is emerging, providing lower incentive for customers to deposit money at a bank This trend, coupled with the rapid depreciation of global currencies, makes it befitting for other options to be explored to mitigate the potential of financial loss.
Norway is a clear example of how investment can serve as a means to mitigate the risk of economic uncertainty through investing and diversification. Norway’s $840 billion sovereign wealth fund is a wonderful solution towards creating financial security for its people, with 18% of its assets invested in Asia and Oceania. A massive applause for Norway for taking this initiative, which displays that governments are capable of performing righteous actions(on par with Iceland jailing its bankers, while other countries have bailed them out with taxpayer’s money). However, we can not rely on the government and banks to perform heroic and intelligent actions in our interests, and in fact can even quite reasonably state that both of these institutions should most often not even be trusted.
The industry norm is that investment bankers can lose substantial amounts investing, and still receive bonuses and government bailouts. There is no strong incentive to deliver value, a dangerous state for such a leveraged industry. For insight into how reckless investment banks can be, consider this example: Goldman Sach’s lost 98% of Libya’s sovereign wealth fund in 2008, through a series of unintelligent investments. This is a complete opposite reflection of how those operating in the real world of business must behave, and a reason to be disgusted with the reckless behavior of investment banking. It is quite reasonable to conclude that banks are reckless, not to be trusted, and financial liberty must be taken into our own hands.
The futuristic trend of investing in Asia, into smaller, actively managed funds that have strong incentive to deliver to investors, must emerge as a means for people to safeguard their assets, and to mitigate the risk of financial loss by simply depositing money in a bank account. Investing should emerge as a norm and necessity for the global population to avoid unnecessary losses, and the right due diligence can make one’s assets safer than cash.
Individuals Accept Unnecessary Losses When Banking
Countries that are experiencing massive FX losses should help their customers by providing higher interest rates, yet this is often not the norm. Customers depositing money at banks are unnecessarily being penalized by high FX losses. If a country has a poor performing currency, a simple and rational solution is for banks is to provide higher interest rates for its customers. For example, the Mongolian tugrik has historically been a very poor performing currency, yet Golomt Bank now offers 14.4% interest if you open a tugrik based savings account. The euro dropped to a 10 year low last year, representing a major thorn for those who have been holding a Euro based savings account.
Is it reasonable to hold the euro in a savings account at negative interest, and to also be skeptical of Asia being a high risk investment destination? The euro is one of many cases of currencies depreciating substantially against the USD, and the addition of negative interest further amplifies the loss.
Negative interest rates continue to emerge, as a desperate attempt for academics to attempt to restore slowing economies, while many frontier and emerging markets deliver strong economic growth. Hungary recently became the world’s sixth monetary authority to introduce negative interest rates, and is currently joined by Sweden, Denmark, Switzerland, Japan, and the Eurozone. The new trend of negative interest rates for poor performing currencies makes skepticism befitting, and increases the appeal of investing in high growth opportunities in frontier and emerging Asia.
Vietnam as a Safe Haven
For too long the world has centered its attention on the Federal Reserve,and viewed the USD as the appropriate benchmark, and a safe haven. Frontier and emerging markets are relegated based on a general irrational sell off, while little attention is given to cherry picking through these areas to find the brightest spots. Frontier and Emerging Markets should be considered true safe havens.
Among all frontier and emerging markets, Vietnam stands out as a positive outlier as a high growth economy, that is poised for even greater growth through 2025; Eurasia Group projects GDP growth will reach 11% by 2025. Moreover, Vietnam’s stock market outperformed ASEAN stock market by 24% and the MSCI frontier market index by 17% during 2015, yet still has impressively low valuation.
Investment in Vietnam can serve as a safe haven for the world, amid the large number of economic slowdowns/depreciating currencies, and negative interest rates that are continuing to emerge. Investment in Vietnam should serve as a way for individuals to safeguard a portion of their assets, in addition to other traditional forms of investment, such as physical gold, bonds, and real estate. Diversification is the key amid the economic certainty that is ahead.
Stock Market Discount: The P/E for Vietnam’s stock market is 11.7, and the average dividend yield is 3.9%. This strong discount to emerging Asia offers 30-40% upside simply based on Vietnam eventually transitioning to an emerging market, and can be considered a conservative trait amid the decreasing investors’ confidence for frontier and emerging markets. Targeting SMEs in Vietnam provides the opportunity for investors to invest at even lower valuation, and to have substantially higher dividend yields(9-10% is not abnormal).
FDI Shift: Companies such as Samsung, Microsoft, and Intel have shifted manufacturing from China to Vietnam for comparatively lower wages. This is old news. In recent news, Apple announced its plan to invest $1 billion to build a new data centre in Hanoi. A flurry of companies from China, Hong Kong, Taiwan, Japan, and South Korea are pouring money into Vietnam, to capture the trend of high opportunity that Vietnam offers as a low cost manufacturing destination.
Favorable Macroeconomic Trends: Trends of high growth are present throughout Vietnam; the country’s annual GDP growth was 7.01% during the 4th quarter of 2015, and retail sales have averaged at 21.56% since 2002.
Improvements: Banks in Vietnam have drastically improved NPLs, with the majority of banks having NPLs under 3%, and inflation has declined to 1.26%.
High Growth Industries: There are a large number of high growth industries which present strong opportunities for value investing, including the following industries: manufacturing(plastic, automotive, pharmaceutical, textile), real estate and construction, consumer staples, and financial services.
FX Risk Offset: Vietnam’s currency has been relatively resilient, only depreciating 5% during 2015, and the potential for strong capital gains and the 3.9% average dividend yield provides justification for this slight risk. China’s devaluation last August caused an FX nightmare in Asia, and future Fed rate hikes worsened this scenario. The resilience of Vietnam’s currency during these times has been impressive.
Large Presence of Funds: Vietnam is no contrarian destination for the asian hedge fund industry, and there are even a large number of Europe based funds that focus on Vietnam’s upside potential. There are a large number of unlisted closed end and open end funds that investors can take advantage of, as well as funds trading on the London and Irish Stock Exchanges. Rather than depositing money at a bank, potentially at negative interest, serious consideration should be given to Vietnam, as a means to safeguard one’s assets.
Investors should highly consider smaller, actively managed funds, that have a superior understanding of Vietnam’s economy, and chose to invest in Vietnam for the specific, futuristic opportunity they envisioned. In this manner, investors can ensure that they access funds with superior insight into how to access Vietnam’s growth. A simple assessment of historical performance is an excellent way to filter through these funds to find the best value, and to find successful value investors.