Apr 19, 2012
I just published a long and detailed look at the current state of Vietnam from a fundamental perspective which culminates with my recommendation on where I see the market and how one could play it. I invite you to read the entire article at Motley Fool here. Since The Fool is fundamentally oriented I did not include in the article my technical read on the market or the mechanics of the trade I recommend at this point. Skip past the jump for that.
Here's an excerpt:
The Vietnamese equity markets have been on fire since the beginning of 2012. The market made an intra-day bottom at 332.28 on January 6th, and other than a month-long pause in March has moved strongly higher, closing at 472.98 on Tuesday, April 17th, outpacing many developed markets by a 3:1 margin. Foreign investors have woken up to the situation as the AUM on the Market Vectors Vietnam ETF (AMEX: VNM) has expanded $50 million since the beginning of March and is up 31.5% year to date. So, after this kind of performance over a relatively short period of time, is Vietnam a Buy, Hold or Sell right now?
Let’s take a look.
Historic P/E ratios may provide a clue. The 5 year high for the VN Index was made back in 2007 at a multiple of 45.37. The low was made in late 2011 at 8.35. Right now the VN Index stands at 11.31. Does that mean the VN is undervalued? Looking at the potential credit risks within the economy, it is hard to say yes. Total Debt to GDP though 2011 rose inexorably over the last decade. The percentage of it held by private enterprises was low, meaning much of the credit in the system is bound up in the less-efficient State Owned Enterprise sector. This was causing a drag on earnings in the latter half of 2011 as the full weight of ultra-tight monetary policy was beginning to be felt.
I looked at the volume histogram to see where the action has been. A tremendous amount of accumulation has occurred around 428 on the VN Index; a good sign that the market found fair value there. My thoughts on buy, sell or hold are as follows:
If you are long, I would remain so as the market is in a bullish posture right now.
If you are not long then I would recommend the following trade:
- Go long here with an upside multiple target of 15. Current multiple is 11.3.
- Set your sell stop at 428, a multiple of 10, because any break of that could set off a cascade back to the all-time low of a multiple 8.3.
- This gives you a risk to reward ratio on the trade of approximately 4:1 so allocate capital appropriately.
The monthly chart put in a 2 bar reversal in February, building on it in March and April. There will likely be some resistance around 475, the September 2011 high, which we are seeing emerge in the past two sessions as well as at the double top from March & May 2011 around 485-490. The chart below is from the weekend, the top at 468 has been surpassed though the market sold back to 467 last night.