When investing in Vietnamese equities, midcap stocks offer investors a route to outperformance with exchange-traded funds (ETFs) providing an optimal investment vehicle, according to Dragon Capital, incorporated in 1994 and with a current AUM of $5.5bn, of which their ETFs make up over $1bn.
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Suu Vu, Dragon Capital’s lead ETF Portfolio Manager
Suu Vu, Dragon Capital’s lead ETF Portfolio Manager, said: “Investing in midcap ETFs allows for extensive sector involvement, and our experience has led us to entities that have gone on to become market leaders. Investing in midcaps in Vietnam is effectively a frontier within a frontier, and participating early provides exposure to high growth possibilities before valuations potentially rise.”
Vietnam’s midcap sector offers widespread access to the country’s compelling fundamental drivers, including strong GDP growth, forecast to hit 6.0% next year; a young, steadily growing middle class from a population of 100m people; and Vietnam’s position as a burgeoning tech and manufacturing powerhouse.
The country has been the world’s most obvious beneficiary of China-US trade tensions and the China Plus One theme that has accompanied them. In September 2023, Vietnam elevated its US diplomatic relations to the highest level of “Comprehensive Strategic Partnership”, with Japan following suit in November. As multinationals seek to diversify from China, Vietnam has become a natural choice. In the first 11 months of the year, dispersed FDI in Vietnam totalled $20.3bn, on track to beat 2022’s record-setting $22.4bn, helping boost exports to an impressive $322.6bn. This equates to approximately 72% of Vietnam’s 2023 GDP, forecast to grow by 5.0% this year, ten times higher than the IMF’s forecast of 0.5% for the UK.
Investing in Vietnamese midcaps offers investors early access to the next generation of large-caps, rather than some of the current large-caps that have already been comprehensively rewarded with a premium market valuation. Year-to-date, Vietnamese midcaps have outperformed the VN Index (VNI), returning 29.6% vs 9.4% for the VNI.
Midcaps tend to outperform large-caps during a market recovery and for investors who already have large-cap exposure, they represent an opportunity to reposition tactical allocations for better returns.
Suu added: “The midcap sector, a crucial component of Vietnam’s capital markets, often goes unnoticed by investors. Companies in this segment can offer significant long-term prospects and can be suitable for a risk-adjusted diversification play. Providing access to a dynamic and rapidly expanding economy, they offer a wider range of overlooked sector exposure.”
The midcap sector is more diversified than its large-cap counterpart. Banks heavily dominate the large-cap VN30 index, accounting for 50.9%, while real estate comprises a further 11.5%. In the VNMidcap Index, however, those figures are 20.2% and 21.3% respectively. Midcaps accounted for 45.6% of daily turnover on the VNI year-to-date, or $290m, higher than the total average liquidity of many emerging markets.
However, investors have faced challenges in assessing individual midcap stocks. There is very limited research coverage below large-caps in many emerging economies, companies aren’t always accessible, and English language disclosures can be hard to find.
Consequently, ETFs offer broad-based exposure to midcaps with low fees and good liquidity.
Dragon Capital’s DCVFM VNMidcap ETF, which tracks the VN MIDCAP Index, is the first product to approach the midcap segment in this way and has delivered 30.7% year-to-date as of 12 December, 2023.
Source : ETFWorld.co.uk
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