The conflicts in Ukraine and China may have caused a flight-to-safety, resulting in U.S. Treasury yields dropping. However, investor behavior seems to be more driven by whether China’s growth is bottoming or whether recovery in the West is beginning to fire up Asia’s export cycle, rather than the political instability afflicting the country.
Though the recent tensions in the South China Sea seem to have gathered much attention, the markets don’t seem to have factored in the conflict. This comes from the fact that past confrontations in the South China Sea have always stopped short of military confrontation, given the massive power imbalance between China and its neighbors. Market expectations from the current Sino-Vietnam situation seem to be similar. Moreover, markets are often driven more by economic risks than political risks.
Though the South China Sea showdown did slice more than 5% off the Vietnam’s Hanoi stock market, broader economic consequences have largely been muted. The FTSE/ASEAN40 index, which tracks 40 stocks from Indonesia, the Philippines, Singapore, Malaysia, and Thailand, rose 1% since the May 7 shoot-out by a Chinese ship at a Vietnamese vessel along the South China Sea, which triggered flare-ups between China and Vietnam.
With Vietnam being the focal point of the current tensions in the South China Sea, the Vietnam stock market sure has experienced volatility over the past weeks. The VN Index, which had gained 22% in 2013 and a further 20% during the first three months of 2014 after peaking on March 24, 2014, retreated 16% over the past couple of weeks—9% of which was lost since the beginning of May.
The combined market capitalization of both of Vietnam’s bourses, the Hanoi stock exchange and the Ho Chi Minh City stock exchange, declined from $54 billion to $49 billion within 15 days since the China-Vietnam tensions were triggered on May 1. According to Bloomberg, the VN Index now trades on a trailing P/E of 12.4 times earnings versus a trailing P/E of 13.9 times earnings as of the end of April.
While the rising geopolitical tensions are creating much market volatility, they’re also creating problems for multinationals that rely on these countries for manufacturing. The Vietnamese textile and apparel industry’s customers include the top labels worldwide, such as U.S. brands JC Penney (JCP), Nike Inc. (NKE), and Gap Inc. (GPS).
The performance of exchange-traded funds (or ETFs) like the China focused iShares FTSE/Xinhua China 25 Index Fund (FXI) and the Vietnam-focused VanEck Vectors Vietnam ETF (VNM) are directly affected by these events, as they’re primarily invested in these economies. Emerging market ETFs like the iShares JP Morgan USD Emerging Markets Bond ETF (EMB) also give cues as to the direction of emerging market economies.
Though domestic flows to Vietnam’s bourses may have taken a hit amid the rising tensions, foreign investors continue to take advantage of the stock market retreat on the expectation that falling prices due to the escalating tension with China will prove short-lived. With a net purchase of $65 million worth of securities from the Vietnamese market during the first half of May, compared to a net purchase of $83 million in the full month of April, foreign value investors seem to be out shopping at discount prices.
To learn more about investing in global equities, see the Market Realist series The risks and returns on domestic and overseas bond funds.