Vietnam ETF Wilts Along With Growth Expectations

Shares of the Market Vectors Vietnam ETF VNM are trading lower by one percent Wednesday, extending losses that have forced the lone ETF tracking the Southeast Asian nation down nearly eight percent in the past month. A disappointing second-quarter GDP growth forecast appears to be the catalyst.

In a new report, Vietnam's Ministry of Planning and Investment said it expects the country to show second-quarter GDP growth of 4.8 percent, down slightly from the 4.89 percent growth rate posted in the first quarter.

If the second-quarter forecast proves accurate, Vietnam's economy will need to ramp up in the back half of this year to meet the 2013 growth target of 5.2 percent set by the the Asian Development Bank last week. ADB also said Vietnam's economy could grow by 5.6 percent next year if the government there makes progress toward bolstering the ailing banking sector.

As has been frequently noted over the past several months, Vietnam is working to piece together a plan to TARP-esque debt asset management company to absolve Vietnamese banks of scores of sour loans. Vietnamese banks have been struggling under the black clouds of bad debt and loans, an overhang that has predictably pressured VNM. The ETF allocates 38.3 percent of its weight to the financial services sector.

Until recently, Vietnamese stocks had been the second-best performers in Asia this year behind Japanese shares, but VNM has slid six percent in just the past week. The ETF has struggled since March. Late that month, Prime Minister Nguyen Tan Dung rejected a proposed version of the Vietnam Asset Management Company, saying the plan did not go far enough. The Vietnam Asset Management Company, arguably that country's equivalent of TARP, was configured to only deal with banks' bad loans, not their bad debts.

Dung wants the asset management company to address both bad loans and bad debts. Already grappling with slowing growth, 2012 was Vietnam's most sluggish GDP increase in 13 years, the State Bank of Vietnam cut interest rates last month for the seventh time since the start of 2012. Inflation is seen as tame by Vietnam's standards and liquidity is viewed as adequate by outside investors, but banks simply are not a position to extend credit and increase lending.

Not surprisingly, the recent woes of Vietnamese banking shares have prompted some favorable valuations in the countries broader market, which has a combined market value of just $44 billion, or just more than 20 percent the size of Procter & Gamble's PG market cap.

Vietnamese stocks trade for about 11 times estimated earnings, the lowest in Southeast Asia, according to Bloomberg. VNM had a P/E ratio of 14.39 and a price-to-book ratio of 1.47 at the end of March, according to Market Vectors data.

That compares with a P/E of almost 18 and a price-to-book of almost three on the iShares MSCI Emerging Markets Index Fund EEM.

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