Portfolio Update (and Vietnam)

Well, that was fun!  After a serene 2017 and a rampant January, Mr. Market handed out a harsh dose of reality during February with the S&P 500 Total Return falling 10%+ intra-month before recovering.  In the midst of this, OM did very little during the month; adding to the Greece position and beginning a new one in Vietnam.  Let’s touch a little on both decisions, before looking more broadly at how the volatility is impacting OM’s view going forwards. 

Greece 

While the market was hitting its lows, Greece successfully issued a 7-year bond in an oversubscribed offering.  This alone reflects the change in investor perceptions, and is further highlighted by the 3.5% yield on the bonds (or a mere 75bps above similar US Treasuries)!  There remain hurdles to clear, most notably agreeing suitable debt relief and a post-bailout monitoring arrangement, but OM saw the successful bond issuance as another sign that things are on the right track.

 Vietnam

The argument for Vietnam is a simple one; it looks like China/Thailand 15-25 years ago and is treading down the same path.

- After the property bubble, there was a long and drawn out restructuring in the bank sector that started in 2011.  It took till 2015 before real estate transaction volumes really started to recover.  Now, with the real estate sector stabilized, the strength of the rest of the economy is becoming more apparent; growth is good, inflation is under control (2.5-5%), rates are low, and the government is using foreign inflows (see below) to build reserves.

- Vietnam has one of the lowest labor costs in Asia, with a young and educated demographic profile.   This comes at a time when labor costs in China (and Thailand) are rising due to an aging population.

- Vietnam is already a consumer-centric economy (65% of GDP) meaning the combination of good demographics (an influx of young workers) and job opportunities (see next point) sets up a virtuous cycle of opportunity.

 - Vietnam is seeing substantial Foreign Direct Investments (“FDI”) from global multinationals.  This began with Samsung’s $13bn investment in 2014 (and follow-up commitment of $7bn more by 2017) and has continued apace with 2017 setting a new record.  The Vietnamese government is continuing with reforms to further encourage foreign multinationals to set-up and invest.

 - In the medium-to-long term, if Vietnam is to follow in China’s footsteps and become the next up-and-coming Asian manufacturing powerhouse, further industrialization and urbanization lies ahead.

- The Vietnamese government has targeted a 70% market cap to GDP ratio (currently ~46.5%), which seems achievable given that similar countries include Singapore (200%+), Thailand (~90%), Philippines (~80%), and Malaysia (~120%).  The government is facilitating this through easing foreign ownership restrictions, privatizations and equitizations.  From OM’s Argentina discussions, you will remember these are all key criteria in moving from being a “Frontier” market to an “Emerging Market” and the wall of $ that brings.  For those that enjoy history’s rhymes, Vietnam’s government floated the company’s largest beer company (SABECO) in late 2016, and just sold a majority stake to ThaiBev.  The historians amongst you will note that back in 1993, Tsgintao Brewery was the first Chinese state-owned company to list in Hong Kong creating the H-share market that has blossomed today.

This week brought further confirmation of the interest in Vietnam, with Warburg buying a stake in Techombank and Amazon poised to enter the country, which both help indicate the strength of the long-term opportunity.

Overall

So what did February change in OM’s outlook?  In the immediate-to-short term, not a lot - new highs are likely coming and the speed of their arrival (the quicker the better) will provide more clues as to how far the market might run in the medium-term.  However, it is equally clear that the probability of 2019 being spectacular (think 3,500 on the S&P 500) was significantly diminished by the depth of February’s slump. 

As such, while OM is certainly not forecasting any end of the bull market it’s certainly wise to start preparing for it.  This is something OM is pondering and will be the focus of an upcoming post, but to whet your appetite here are the three positions that are likely most at risk of seeing their position sizes reduced:

- Brazil:  OM’s Brazil positions are very indicative of where the market finds itself, somewhere between rolling over and surging to impressive new highs.  Technically, it’s one of the clearest/most interesting charts out there – based on OM’s analysis, either we see 89-90K on the iBovespa relatively soon and are on the pathway to impressive new highs, or there’s likely a much more substantial pull-back.  Fundamentally, OM continues to like Brazil but with an election coming up later in 2018 it’s unlikely to remain vastly outsized unless we see that push to impressive new highs.

- IBB:  Biotech has done fantastically over the past few years, but of all the things OM owns it looks the closest to exhaustion.  Given how far it has come a pull-back could be substantial, and OM worries that should that occur the receding tide will reveal more Theranos’ swimming naked!   The decline won’t be as dramatic as Tech’s 99/00, but OM is using that as his broad heuristic and will be happy to wait until he hears other investors proclaim how they don’t invest in biotech/binary situations before diving back in.

- Uranium: Fundamentally, and conceptually, OM loves the Uranium thesis – it’s probably his favorite in the book.  However, as the chart below shows the price action sucks – sharp bounces when the production cuts were announced but no follow through.   Unless things turnaround, and soon, expect the position to be vastly reduced.