PXP Vietnam to Start Hedge Fund, Bets on Stock Market Recovery

Nov. 10 (Bloomberg) — PXP Vietnam Asset Management, which oversees $225 million, plans to start a hedge fund by early next year as it seeks bargains in Asia’s second-worst-performing stock market, said co-founder Kevin Snowball.

The PXP Vietnam Value Fund will raise as much as $200 million to invest in undervalued stocks, Snowball said today.

PXP, the initials of Phan Xi Pang, Vietnam’s highest mountain, is betting that the stock market will recover as inflation eases and the nation’s trade deficit widens at a slower pace. The benchmark VN Index may double to 750 by the end of 2009, Snowball said.

“In the long term, the story’s intact,” Snowball, 47, said in an interview in Ho Chi Minh City. “As long as the government handles the development of the economy and the market correctly – – so far they’re doing a very good job — then I think we’re fine.”

The index of 163 companies traded on the Ho Chi Minh Stock Exchange has lost about 60 percent this year, the biggest decline in Asia after China. It is set to rise to 500 by the end of the year “given continued diminishing volatility globally and macroeconomic stability,” Snowball said. The index rose 1.5 percent to 371.61 as of 9:30 a.m. in Ho Chi Minh City.

The Vietnam Value Fund will be PXP’s first open-ended fund, allowing investors to withdraw their money after a one-year lock- in, with restrictions on what can be redeemed at once.

The fund will have the “flexibility to use hedging when and where available, and if the manager feels it appropriate taking pricing and market conditions into account,” Snowball said.

Starting Small

PXP will initially raise as much as $20 million from “friends and family,” those that had earlier invested in its older funds and the firm’s own money, Snowball said.

“It will start small and then build its performance record before a full launch by early 2009,” he said.

The Blackhorse Enhanced Vietnam Inc., an open-ended Vietnam- focused hedge fund managed by Singapore-based Blackhorse Asset Management Pte., declined 51 percent through September this year, according to data compiled by Bloomberg.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profit from speculation on whether the price of assets will rise or fall.

PXP, set up six years ago by Snowball and Jonathon Waugh, currently manages three closed-end funds listed in Ireland that invest in publicly traded Vietnamese companies and those preparing to list on the stock exchange.

Right Timing

The PXP Vietnam Fund gained 38 percent in 2007, the best- performing Vietnamese equities portfolio, according to LCF Rothschild Emerging Market Funds Research. The fund outperformed the 23 percent gain in the benchmark stock index last year.

The funds have been hit by the stock market’s retreat this year. The PXP Vietnam Fund declined 67 percent, the Vietnam Emerging Equity Fund fell 67 percent and the Vietnam Lotus Fund lost 56 percent through October, Snowball said.

Vietnam-focused funds tend to have a “long-biased strategy,” said Kostas Iordanidis, head of hedge funds at Unigestion Holding SA, which invests $3.5 billion in hedge funds worldwide. The firm doesn’t have any investment in Vietnam funds.

“If you like Vietnam, it’s a great product, if you don’t like Vietnam, it’s a horrible product,” said Iordanidis, who is based in Geneva. “It will outperform on the way up and underperform on the way down, so it’s market timing.”

Interest-rate increases earlier this year and a subsequent slowing in inflation helped ease investor concerns in the second quarter that Vietnam was heading into a currency crisis.

Cheap Stocks

The central bank has cut interest rates twice, each by a percentage point, since Oct. 20, as the world tips toward a recession following the global financial turmoil. The benchmark stock index has risen 13 percent since hitting a two-and-half- year low on Oct. 28.

PXP’s funds sold some of their holdings during the third- quarter rally to raise cash. PXP started buying shares again during the market’s recent decline and is now fully invested, Snowball said.

“There are some very cheap stocks here; there are also some extremely badly run companies,” he said. “We’re at the beginning of the rally so that almost everything is going up; as we go higher there’ll be more discrimination.”

The Vietnam Value Fund will buy the shares of as many as 20 of the country’s biggest companies where it can find “value and growth,” Snowball said.

Hedge funds aggravated the sell-off in Vietnam this year as they dumped stocks to meet investor redemptions, Snowball said.

“We felt there was too much attention being given to what foreigners were doing in this market, but it seems to be hedge funds selling,” he said. “That’s not people taking a view on Vietnam particularly.”

Snowball moved to Vietnam in 2001, a year after the nation opened its stock market. He previously worked at investment banks for 17 years, including stints at ABN Amro Holding NV and Deutsche Morgan Grenfell.

To contact the reporter on this story: Netty Ismail in Singapore nismail3@bloomberg.net.

S&P Most Concerned About Pakistan, Sri Lanka, Vietnam in Crisis

By Patricia Lui

Nov. 10 (Bloomberg) — Pakistan, Sri Lanka and Vietnam are the Asian countries most at risk of a credit-rating downgrade as the global economy heads into a recession and funds become scarcer, said Standard & Poor’s.

“Pakistan is the weakest, followed by Sri Lanka, then Vietnam,” said Elena Okorotchenko, head of Asian sovereign ratings at S&P. “Pakistan faces severe pressure from the external side, the fiscal side, the monetary side, economic growth and politics. There are five angles in which we analyze a country’s ratings and Pakistan is negative on all counts.”

Foreign investors are exiting Asia’s emerging markets as they seek less-risky returns amid the worst financial crisis since the Great Depression. That’s making it more difficult for nations in the region to pay for imports and is shrinking their foreign reserves.

“No country is immune from the global turmoil,” Okorotchenko said in a Nov. 5 interview in Singapore. “Asia is facing this crisis in a far stronger position than 10 years ago. But even countries with very strong fundamentals are facing fund pull-outs as investors de-leveraging have no regard for fundamentals.”

Pakistan’s credit rating was cut by S&P on Oct. 6 to CCC+, or seven levels below investment grade, on concern it won’t be able to pay its $3 billion debt servicing costs due in the coming year. It approached the International Monetary Fund last month for a bailout package after its foreign reserves shrunk to $3.71 billion on Oct. 25 from $14.2 billion a year ago.

Funding difficulties are the biggest threat to Sri Lanka’s ratings, Okorotchenko said. S&P rates Sri Lanka’s long-term foreign currency debt at B+ with negative outlook.

Funding Concerns

“Sri Lanka is facing funding concerns with rising short- term commercial debt while expectations of efforts to bring down fiscal deficits have proved incorrect,” she said. “I cannot know at this stage if they will go to the IMF but they will definitely need to think of their funding sources.”

Sri Lanka President Mahinda Rajapaksa unveiled a 1.19 trillion rupee ($10.8 billion) budget on Nov. 6, up from an estimated 1.02 trillion this year, and plans to increase overseas borrowing next year to fund the shortfall even as the IMF said reliance on foreign debt to finance expenditure could destabilize the nation’s economy.

Vietnam is the least weak of the three countries with negative outlooks, Okorotchenko said. “Measures by the central bank to address overheating in the economy seem to have worked,” she said. “Inflation and the current account deficit are coming down.”

S&P lowered Vietnam’s BB long-term foreign currency rating outlook to negative on May 2, citing the overheating economy which threatened stability.

`Low Transparency’

“Our biggest concern now is their banking sector which was the main contributor to the overheating problems,” she said. “Now, the banks are sitting on these loans made during cheap funding times. Lending has almost stopped and the question is how this is going to affect banks, especially the small joint stock banks.”

The ratings company is unclear on the extent of problems in Vietnam’s banking sector due to “low transparency,” Okorotchenko said.

“We are concerned about the state of Vietnam’s banking system and transparency is so low nobody knows how bad the situation is,” she said. “It’s difficult to get any reliable information on the state of the banking system.”

Even so, Okorotchenko doubts that Vietnam will need to turn to the IMF for aid as the country is “not heavily indebted.”

Risks Shifting

Aside from Pakistan, Sri Lanka and Vietnam, S&P is also “closely watching” India, South Korea, Malaysia, Thailand and Indonesia even as the rating company maintains a stable outlook on them “as their balance of risks is shifting,” she said.

Fitch Ratings today lowered its outlook on South Korea’s credit ratings to “negative” from “stable,” citing concern that its foreign-exchange reserves may decline as the country faces its biggest crisis since 1997. Fitch also lowered Malaysia’s outlook to “stable” from “positive.”

South Korean banks’ funding requirement is the top concern for S&P, Okorotchenko said. “Korea is facing this crisis from a stronger position and we recently affirmed their stable outlook,” he said. “But the banks’ funding needs are high, especially the short-term. For now, we think the risk for sovereign ratings is balanced.”

For problems for Malaysia “are a mixture of both fiscal and political,” she said. “Transition to democracy can never be smooth and while it may be positive in the long-run, there can be bumps long the way.”

Political Uncertainty

“India has always been running a deficit but they’ve been consolidating and our upgrade last year to investment grade was based on its fiscal progress,” she said.

Thailand is being monitored for political uncertainty, she said. “If it gets out of hand, affects policy decision making and long-term investor sentiment is damaged, these could potentially lead to negative outlook or a downgrade.”

S&P is “least concerned” about Hong Kong, China, the Philippines, Cambodia and Mongolia, Okorotchenko said. “They are on different rating levels but they are stable in their respective ratings,” she said.

Hong Kong’s “fiscal and external positions are solid” while “Singapore is the strongest in the region due to its reserves and robust public finances,” she added.

To contact the reporter on this story: Patricia Lui at plui4@bloomberg.net