Market Focus

ETF Strategy

Joanne Goh (65) 6878 5233 joannegohsc@dbs.com ed: TH / sa: JC

Key investment theme

Vietnam has been transformed from an inward looking country to one that is globalised, market-based, with a stable socio-political situation and is now among the world’s fastest-growing economies.

Not an emerging market yet under MSCI benchmark classification, Vietnam is currently the ninth-largest country weight in the iShares MSCI Frontier 100 ETF (FM), at 3.24%.

Last year, Vietnam formed a commission to explore taking the necessary steps for the country to shed its frontier status and gain entry into the widely followed MSCI Emerging Markets Index. One hurdle Vietnam must clear before becoming a credible candidate for the emerging market upgrade is foreign ownership.

The Prime Minister on Thursday ratified Decree 60/2015 to replace Decree 58, which included a long-awaited regulation on removing limits on foreign ownership in listed companies. Under the new decree, foreign stakes can be lifted up to 100% for most sectors. However, the limit on foreign stakes at banks will be retained at the existing level of 30%.

The new decree will not only have a huge, positive impact on the development of the securities market but also accelerate the privatisation process that the government is determined to hasten drastically and efficiently.

Market highlights

Vietnam has a market capitalisation of 1,086tn dong (US$44.5bn) and its GDP stands at US$171.4bn, which equals 0.26x of GDP, making it a clear investment destination.

Currently there are 31 out of 303 listed companies where foreigners are allowed to invest. These account for about 30% of market capitalisation.

VNINDEX Index (or Vietnam Ho Chi Minh Stock Index) had touched a 52-week high of 644.56 points on 3rd Sept 2014, while it hit a low of 513.06 points on 17th Dec 2014. It is currently trading at 550-600 points.

Vietnam stock market is currently trading at 12x, 30% lower than the rest of the region.

Economic highlights

Vietnam’s economic recovery is on track, driven by private investment capital with foreign direct investments.

Vietnam’s economy is expected to expand its GDP growth rate to 6.2% for 2015 and do better in 2016 with 6.5%, according to official forecasts.

Exports growth has been sluggish due to weak agricultural and commodity prices. But electronics exports has been the bright spot, growing 64% y-o-y in the first quarter.

The Vietnam dong is pegged to the USD. The State bank of Vietnam has already devalued its currency twice this year, by 1% each in January and May. This is to bring the currency in line with the regional currencies which have all depreciated against the USD.

Vietnam’s inflation continues to decline from its peak of 23% in August 2011 to 4% in 2014 and has further flattened to 2% in 2015, thanks to low global oil prices. There is room for monetary easing amid falling inflation.

Vietnam has a strong demographic profile. This has helped with the country's labour cost competitiveness and domestic demand. Sustained growth of disbursed FDI (foreign direct investment) signifies the country's attractiveness as a manufacturing hub. Its greatest asset is its educated, skilled human capital with its population of 90m and a young workforce, where 45% is under 30 years of age.

Policy challenges are underway to reform banks and state-owned enterprises and integrate the domestic firms into global supply chains and improve infrastructure.

The country’s biggest challenge is the management of its public debt which is approaching 65% of GDP. The debt is unsustainable with long-term projects being financed by short-term loans.

In the roadmap to liquidation of state enterprises, about 340 SOEs will be liquidated from 2015-2017 and with estimated auction value of US$25bn.

Investors can gain exposure to Vietnam via the

following two ETFS listed in the US and Singapore

ETF Bloomberg/ Reuters/Local code Market Vectors Vietnam ETF VNM US Equity / VNM db x-trackers FTSE Vietnam UCITS XFVT SP Equity / DFVT.SI/ HD9

Source: DBS. Tear sheets enclosed.

cc. Enclosed report by Irvin Seah on Vietnam: “Brighter Sparks”, 11June “Asia’s latest electronics spark”, 1 July

Asia Equity Strategy

Investment opportunities in Vietnam

Refer to important disclosures at the end of this report

DBS Group Research 2 July 2015

Market Focus

ETF Strategy

FTSE Vietnam vs MSCI Asean, USD terms

FROM 1/7/14 TO 1/7/15 DAILY INDEXED

JUL AUGSEP OCTNOVDEC JAN FEBMARAPRMAYJUN JUL80

85

90

95

100

105

110

115

MSCI ASEAN $

FTSE Vietnam $

Source: DATASTREAM

Source: Datastream

TOP 10 Vietnam Stocks in Ho Chi Minh Stock Index

Top 10 Stocks Index Weight(%) MCAP (USD

Bank for Foreign Trade of Vietnam JSC 11.9 244,249

PetroVietnam Gas JSC 10.8 222,363

Vietnam Dairy Products JSC 10.5 212,247

VietinBank 6.5 133,563

Vingroup JSC 5.8 149,925

Bank for Investment and Development of V 5.7 116,680

Masan Group Corp 5.5 110,552

Bao Viet Holdings 2.5 52,141

Saigon Thuong Tin Commercial JSB 2.1 39,910

Hoa Phat Group JSC 1.9 39,780 Source: Bloomberg Finance L.P.

Companies with Vietnam exposure under DBS

coverage

Company / Sectors Exposure

Gamuda (GAM MK) Gamuda has two property projects in Vietnam – one in HCMC and the other in Hanoi. Sales have picked up of late particularly in Hanoi where for the 9MFY15 period, sales in Vietnam were RM300m or 100% of its full-year target.

Sembcorp Industries (SCI SP) SCI owns and operates industrial parks in Vietnam

Chinese textile and garment companies. Shenzhou International (2313 HK), Pacific Textile (1382 HK) and Texhong Textile (2678 HK)

Taking advantage of lower costs, diversifying risks from China, and most of all, to take advantage of existing duty-free benefits from FTA and possibly the TPP

Source: DBS

Page 2

VNM US Equity / VNM SIPFund Objective & Information DBS ETF RISK PROFILE

DBS Strategic Overview Vietnam

Fund vs. Benchmark Performance (1-year) Inception Date30D AVG Daily Turnover 17.7k Pri. Exchange LeverageBeta to MSCI World Index 0.59 Traded Currency Index PE1YR Tracking Error (NAV) 1.00% Traded Lots Index PB

Fund Data Fund Allocation (Geographical and Sector)Fund ManagerTotal Annual Fees (%) 0.7%Replication strategyPrice (USD)NAV (USD)Premium/ (discount) to NAVAUM (USD million)Net inflows for the month 0.90Average PE 17.1xAverage PB 1.4xDividend Yield 2.8%Dividend Frequency Annual

Top 10 Holdings (%)Bank for Foreign Trade of Viet 8.6Vingroup JSC 8.3Masan Group Corp 6.8Saigon Thuong Tin Commercial J 6.5Bao Viet Holdings 5.0PetroVietnam Technical Service 4.9Petrovietnam Fertilizer & Chem 4.7Donaco International Ltd 4.6Hansae Co Ltd 4.5Soco International PLC 4.5

Market Vectors Vietnam ETF (Vietnam)Geo Focus-Equity Equity

Market Vectors Vietnam ETF is an exchange traded fund incorporated in the USA. The Fund's objective is to replicate as closely as possible the price and yield performance of the Market Vectors Vietnam Index. The Fund invests at least 80% of its total assets in securities that comprise the Fund's benchmark index.

▼

Low

Market Vectors ETFs/USA

High

Vietnam’s economic recovery is on track, driven by private investment capital with foreign direct investments. Its greatest asset is its educated, skilled human capital with its population of 90m and a young workforce, where 45% is under 30 years of age. We expect Vietnam’s economy to expand its GDP growth rate to 6.2% for 2015 and do better in 2016 with 6.4%. Recent reported data supports this positive trend such as: inflation continues to decline from its peak of 23% in August 2011 to 4% in 2014 and further flattens to 2% in 2015 with consumer prices of 0.16% over the previous month’s 0.14%, thanks to low global oil prices. Vietnam’s PMI index hit a record high in May at 54.8. Monetary policy remains accommodative. The country’s biggest challenge is the management of its public debt which is approaching 65% of GDP. The debt is unsustainable with long-term projects being financed by short-term loans. In early May, the State bank of Vietnam devalued its currency, the dong, to boost such efforts. Other policy challenges are to reform banks and state-owned enterprises and integrate the domestic firms into global supply chains and improve infrastructure. The Market Vector Vietnam ETF (VNM) has declined by 6.74% YTD.

14/08/2009NYSE Arca 0USD 16.7x1 1.4x

24-Jun-15

Full18.3118.10

0.18%500.42

8.74.54.64.3

77.8

0 20 40 60 80 100

U.K.South Korea

AustraliaThailandVietnam

5.59.27.6

16.551.2

7.42.6

0 20 40 60 80 100

Basic MaterialsConsumer, Cyclical

Consumer, Non-cyclicalEnergy

FinancialIndustrial

Utilities

UnRated ETF Fact Sheet Page 3

XFVT SP Equity / DFVT.SI/ HD9 SIPFund Objective & Information DBS ETF RISK PROFILE

DBS Strategic Overview Vietnam

Fund vs. Benchmark Performance (1-year) Inception Date30D AVG Daily Turnover 24.3k Pri. Exchange LeverageBeta to MSCI World Index 0.21 Traded Currency Index PE1YR Tracking Error (NAV) 0.06% Traded Lots Index PB

Fund Data Fund Allocation (Geographical and Sector)Fund ManagerTotal Annual Fees (%) 0.9%Replication strategyPrice (USD)NAV (USD)Premium/ (discount) to NAVAUM (USD million)Net inflows for the month 0.00Average PE 13.4xAverage PB 1.7xDividend Yield N.A.Dividend Frequency None

Top 10 Holdings (%)Vingroup JSC 15.4Masan Group Corp 14.4Bank for Foreign Trade of Viet 10.6Hoa Phat Group JSC 10.4PetroVietnam Drilling and Well 7.9Saigon Thuong Tin Commercial J 6.7HAGL JSC 6.3Kinh Do Corp 5.2Saigon Securities Inc 5.1Petrovietnam Fertilizer & Chem 4.7

db x-trackers FTSE Vietnam UCI (Vietnam)Geo Focus-Equity Equity

db x-trackers - FTSE VIETNAM UCITS ETF is a UCITS IV compliant exchange traded fund incorporated in Luxembourg. The Fund's objective is to track the performance of FTSE Vietnam Index.

▼

Low

db x-trackers SICAV ETFs/Luxem

High

Vietnam’s economic recovery is on track, driven by private investment capital with foreign direct investments. Its greatest asset is its educated, skilled human capital with its population of 90m and a young workforce, where 45% is under 30 years of age. We expect Vietnam’s economy to expand its GDP growth rate to 6.2% for 2015 and do better in 2016 with 6.4%. Recent reported data supports this positive trend such as: inflation continues to decline from its peak of 23% in August 2011 to 4% in 2014 and further flattens to 2% in 2015 with consumer prices of 0.16% over the previous month’s 0.14%, thanks to low global oil prices. Vietnam’s PMI index hit a record high in May at 54.8. Monetary policy remains accommodative. The country’s biggest challenge is the management of its public debt which is approaching 65% of GDP. The debt is unsustainable with long-term projects being financed by short-term loans. In early May, the State bank of Vietnam devalued its currency, the dong, to boost such efforts. Other policy challenges are to reform banks and state-owned enterprises and integrate the domestic firms into global supply chains and improve infrastructure. The Market Vector Vietnam ETF (VNM) has declined by 6.74% YTD.

2/19/2008Singapore 0USD 13.5x10 1.7x

25-Jun-15

Derivative25.0825.24

0.25%342.21

100.0

0 20 40 60 80 100

Vietnam

57.514.5

12.58.6

5.21.8

0 20 40 60 80 100

FinancialsConsumer Goods

IndustrialsOil & Gas

Basic MaterialsUtilities

UnRated ETF Fact Sheet Page 4

Market Focus

ETF Strategy

GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published, the analyst and his/her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 31 May 2015.

2. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates may beneficially own a total of 1% of any class of common equity securities of the company mentioned as of 31 May 2015.

3. Compensation for investment banking services: DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates may have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the company mentioned.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

Page 5

Market Focus

ETF Strategy

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Page 6

VN: Asia’s latest electronics spark 1 July 2015

1

VN: Asia’s latest electronics sparkDBS Group Research 1 July 2015

Economics

• Vietnam’selectronicsindustryisgrowingrapidly

• Anincreasinglyimportantdriverofgrowth,Vietnam’selectronicssectorisfastcatchingupwithregionalpowerhouses

• VietnamhasleapfroggedthePhilippinesandThailand,andwillsoonovertakeSingaporetobecomethefifthlargestelectronicsexporterintheregion

• Movingupthevaluechainanddevelopinglocaltalentwillbecrucialgoingforward

IrvinSeah•(65)6878-6727•irvinseah@dbs.com

Vietnam was one of the fastest growing economies in Asia in 2014 and manu-facturing has been the key driver. Much of the improvement in the sector can be attributed to electronics. Vietnam’s electronics industry is fast catching up with the regional powerhouses.

Electronicsboom

The electronics cluster grew rapidly in recent years. Electronics exports expand-ed by 78% per year for the past 4 years reaching USD 35bn in 2014. Electronics accounted for 23% of all exports in 2014, up from a mere 5% in 2010 (Chart 1). Electronics is now a key driver of the economy, accounting for 23.4% of GDP last year, up from just 5.2% in 2010 (Chart 2).

Vietnam’s electronics boom started after 2010 due to a confluence of factors. Faced with weak global demand and persistent cost pressure, many manufac-turers were searching for cheaper locations from which to produce. In addi-tion, competition was intensifying, making the need to restructure the supply chain even more compelling. Vietnam’s pro-FDI policies, a weaker currency and

4.7 5.2

7.4

12.7

19.3

23.4

0

5

10

15

20

25

2009 2010 2011 2012 2013 2014f

Electronics mfgshare of GDP

Chart 2: Electronics driving growth%

4.8 4.96.3

18.2

24.0 23.3

0

5

10

15

20

25

30

2009 2010 2011 2012 2013 2014

Electronics share oftotal exports

Chart 1: Electronics' share of total exports% share

Page 7

VN: Asia’s latest electronics spark 1 July 2015

competitive labour force all added more develop-ment fuel to the sector in subsequent years.

Newkidontheblock

The rise of Vietnam’s electronics cluster is due in part to the structural shift in regional elec-tronics supply chain. Vietnam has captured market share from many of its regional peers. In a process seen over and over in Asia, earlier play-ers saw incomes and wages rise, opening the door for lower cost pro-ducers. Vietnam is the latest new kid on the block.

For example, after years of rapid growth, wages in China are now about 3 times higher than in Vietnam [1]. The has led to margin compression, forcing manufacturers to relocate their production bases.

Beyond the cost advantage, geography plays a role. Vietnam’s proximity to Chi-na makes it easier to integrate into existing supply chains. A growing middle class supporting domestic demand has further strengthened Vietnam’s overall attractiveness for global manufacturers.

FDI into Vietnam’s manufacturing sector has picked up sharply in recent years (Chart 3). This has not been limited to low end labour-intensive manufactur-ing. Increasingly, high tech electronics producers are establishing a presence in Vietnam. Intel, LG, Panasonic and Microsoft are among the global tech giants to have expanded in the country in recent years, marking a shift away from China. This trend is likely to persist. Korean electronics giant Samsung Electron-ics, for example, announced late last year, plans to invest USD 3bn in a new smartphone factory, alongside its existing USD 2bn plant.

6.0

7.8

11.7

17.1

15.5

0

2

4

6

8

10

12

14

16

18

2010 2011 2012 2013 2014

Chart 3: Manufacturing FDI rose sharply

FDI into mfg(registeredcapital)

USD bn

Vietnam’selectronicsindus-tryiscatchingupwithoth-erregionalpowerhouses

CN50.2%

TW11.3%

KR17.4%

SG3.8%

MY7.8%

PH2.7%

TH3.3%

VN3.5%

Chart 5: Asia-8 electronics export share, 2014

0

200

400

600

800

1000

1200

2010 2011 2012 2013 2014

Vietnam electronicsexports

Asia-8 ex-Vietnamelectronics exports

Chart 4: Stunning rise in Vietnam electronics

2010=100

Page 8

VN: Asia’s latest electronics spark 1 July 2015

ElectronicsexportstoreachUSD40bnby2017

Vietnam’s electronics sector is becoming a force in Asia. While electronics ex-ports from Asia-8 (ex-Vietnam) rose by 17% between 2010-14, Vietnam’s elec-tronics exports ballooned by about 10 times (Chart 4) [2]. Asia-8 economies exported about USD 1trn worth of electronics exports in 2014. Vietnam’s ac-counted for 3.5% of the total, up from a mere 0.4% in 2010 (Chart 5). Vietnam has leapfrogged ahead of Philippines and Thailand, and will likely overtake Singapore to become the fifth largest electronics exporter in the region over the next two years.

Brightprospects

In the longer-term, the government expects electronics exports to reach USD 40 bn by 2017. Growth of a seemingly modest 5% per year would achieve the target. Nonetheless, longer-term sustainability of the industry will depend on whether Vietnam can raise productivity and move up the value chain.

The influx of foreign electronics manufacturers has enabled the transfer of technology and skills. But the country needs to develop its own talent pool to sustain the trend. Otherwise, electronics would only migrate cheaper loca-tions once wages start to rise. Indonesia, Cambodia, Laos and Myanmar all of-fer competitive alternatives to global manufacturers.

Note:

[1] Based on statistics by International Labour Organisation, China’s average monthly wages was about USD 613 compared to Vietnam’s USD 197 in 2013.

[2] Asia-8 includes China, Taiwan, Korea, Singapore, Malaysia, Thailand, Philip-pines and Vietnam

Page 9

VN: Asia’s latest electronics spark 1 July 2015

Disclaimer:The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reli-able, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or cor-rectness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further commu-nication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other inter-ests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.

Japan’s“goglobal”experience:implicationsfor 30Jun15China

SG:watchcoreinflation 16Jun15

Qtrly:Economics-Markets-Strategy3Q15 11Jun15

IN:weakmonsoonarisk8Jun15

CN:theAIIBtotestdiplomaticskills 4Jun15

Rates:theriseinglobalyields–wheretonow? 25May15

TH:stillclimbingSisyphus’Hill 22May15

IN:timetodeliver 21May15

KR:whatwilltheAIIBmeanforKorea? 19May15

Asia:breakingnewnewground 11May15 CNH:“Q”expansionheraldsnextstageof 6May15capitalaccountliberalization

Greece:theclockisticking4May15

MY:limitedoptions 29Apr15

IndiaandIndonesia:takingstock 29Apr15

US:overthehump(andslidingfast) 28Apr15

Asiabonds:floatingonayieldcushion 27Apr15

Asia:breakingnewoldground 22Apr15

JP:portfoliorebalancingunderway 16Apr15

US:Fedfundsandsuch 14Apr15

CN:moreinclusiveurbanizationpolicies 13Apr15

TH:furthercutsunlikely 13Apr15

Asiacyclicaldashboard:aneeriecalm 8Apr15

IN:policytobedatadependent 7Apr15

SGD:makingroomforvolatility 6Apr15

CN:recalibratingmonetarypolicy 2Apr15

ID:taxtargetsaretoooptimistic1Apr15

CNH:thegrowinginfluenceofyuan31Mar15settlementinforexreserves

CN:fiscalreformstoaccelerate27Mar15

IN:assessingRBIpriorities 24Mar15

KR:witherexportcompetitiveness? 19Mar15

CNH:afreerChina17Mar15

Qtrly:Economics-Markets-Strategy2Q15 12Mar15

INbudget:growthtrumpsfiscalgoals 2Mar15

ID:noshiftinBI’stightpolicybias 27Feb15

SGbudget:shapingSingapore’sfuture24Feb15

Indiabudget:abalancingact 17Feb15

US:substantialdeflationhere,now 16Feb15

SG:Jubileebudget2015 10Feb15

USDRates:themarketvstheFed 10Feb15

CN:theneedforabetterunemploymentgauge 4Feb15

IN:facingECBQEandastrongdollar 30Jan15

Asia:arecurrenciestoostrong? 28Jan15

ID:deliveryiskey 28Jan15

SG:oldproblem,newapproaches 27Jan15

KR:explaininglowinflation21Jan15

Recent Research

Page 10

June 11, 2015Vietnam

Irvin Seah • (65) 6878 6727 • irvinseah@dbs.com

VIE

TNA

M

VN: brighter sparks

• Growth remains steady; inflation has fallen to multi-year lows

• We expect 6% growth this year and next. Full year 2015 inflation will drop to 1.3%

• Although currency devaluation remains the preferred monetary policy tool, the central bank has some room for rate cuts

The economy is back on the radar screens. Growth is hovering at potential while inflation is at multi-year lows. Except for the risk on the external balance, overall prospects for the economy are good.

Electronics boost

Vietnam was one of the fastest growing economies in Asia in 2014 (Chart 1). Growth hit 6.0% and has remained there in 1Q15. Manufacturing has been the key driver.Much of the improvement in the sector can be attributed to electronics. Electronics exports grew by 64% YoY in the first quarter (Chart 2). Although base effects play a part, structural shift in regional electronics supply chain is the main reason.

Vietnam has captured the market shares of some of its regional peers. The stunning growth in this sector lies in stark contrast to other Asian producers. For example, electronics exports from Singapore have fallen by some 35% over the past two years. During this period, Vietnam’s electronics exports have tripled (Chart 2)!

Essentially, margin compression in the electronics industry has led to structural “hollowing out” in certain electronics segments in some countries. Manufacturers of some lower value added products in more established electronics producing countries were forced to relocate their production base to cheaper locations in order to maintain their profits. Beyond push factors, Vietnam’s pro-FDI policies, cost advantages and a competitive labour force is a strong lure for manufacturers.

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Chart 1: GDP growth for 2014Annual GDP growth, %

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VietnamJune 11, 2015

Against the backdrop of the “hollowing out” phenomenon in countries such as China, Singapore and Korea, FDIs into Vietnam in contrast, has picked up sharply in recent years. For example, Korean electronics giant, Samsung Electronics has announced late last year plans to invest USD 3bn in a new smartphone factory in Vietnam, alongside its existing USD 2bn plant.

Near-term prospects are bright for Vietnam’s electronics industry. Apart from the slight moderation in April, the US SEMI book-to-bill ratio, a leading indicators for global electronics cycle, is reflecting an upswing in global electronics demand compared to mid last year (Chart 3). Expectations are high that strong electronics export sales will continue to lead the improvement on the external front and drive overall GDP growth going forward.

Hence, barring any significant negative growth shock in the global economy, Vietnam is on track to meet our full-year GDP forecast of a 6.0% in 2015 and 6.2% in 2016. That said, policymakers are even more upbeat about the country’s growth outlook. The official growth target has been set at 6.2% in 2015 and 6.5% in 2016.

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Chart 2: Singapore and Vietnam electronics exportsIndex, Jan12 = 100, 3mma

VN electronics exports

SG electronics exports

Latest: Apr15

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Growth in semicon sales

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Chart 3: Electronics cycle improvingIndex % YoY

Latest: Apr15

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Chart 4: Risk on trade balanceUSD bn

Latest: May15

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June 11, 2015Vietnam

Downside risk on external balances

Risks reamin on the external front. Sluggish exports of agriculture products and commodities have weighed on overall export performance. Meanwhile, investment demand for imports has remained strong. Trade balances have deteriorated.

Overall trade balance as of May15 registered a cumulative deficit of about USD 3.0bn. In fact, the ballooning trade deficit is one of the key reasons that prompted the State Bank of Vietnam to devalue the dong in May, its second devaluation since the earlier bout in January (Chart 5).

Prices for agriculture products and commodities are expected to remain depressed due to weak demand. And this will consequently weigh down on the overall trade balance despite the strong showing in electronics. Overall trade balance for the year is now expected to register a deficit of USD 1.2bn, from USD 200mn previously.

Room for modest easing amid benign inflation

Inflation appears to have bottomed. After the steep decline from 5.0% (YoY) in Jun14, inflation has risen from the trough of 0.3% in February to register 1.0% in May (Chart 6). This is further supported by the third consecutive month of positive MoM change in the headline number. While inflation is expected to rise gradually in the coming months, full-year inflation will likely average 1.3% in 2015 before rising to 3.5% in 2016.

Such inflations remains inside the 5.0% target set by policymakers. Granted, the justification for a rate cut is less compelling than at the beginning of the year. But weakening domestic demand remains a concern. Retail sales growth has eased to 8.4% YoY in May, down from 14.9% in January. And overall loan growth of 4.0% in the first four months of the year is still a far cry from the 15%-17% target for this year. To revitalise domestic demand and to ensure that the full-year growth target is met, the SBV may be pressured to ease monetary policy further.

Indeed, though exports will provide the boost, weakening domestic demand will be a drag on overall GDP growth performance. The SBV has thus far preferred to devalue the dong to mitigate against the ballooning trade deficit and to preserve its foreign reserves. A more accommodative monetary policy amid a global disinflationary environment will not contradict the current policy direction. While we have since removed a 100bps rate cut for the second quarter, we have maintained the view for another 50bps cut in the third quarter of the year.

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Chart 5: Dong devalued twice this yearVND/USD

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Chart 6: Inflation has bottomed% MoM sa

Latest: May15

% YoY

Inflation forecast for 2015 lowered to 1.3%

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VietnamJune 11, 2015

Vietnam Economic Indicators

2014 2015f 2016f 1Q15 2Q15f 3Q15f 4Q15f 1Q16f 2Q16fReal output and demandGDP growth 6.0 6.0 6.2 6.0 5.9 6.1 5.8 5.9 6.0

Real supplyAgriculture & forestry 3.5 2.9 3.1 2.1 3.2 3.3 3.0 3.2 2.8Industry 7.2 7.6 7.3 9.0 7.0 7.2 7.1 6.6 7.5Construction 7.1 6.1 7.5 4.4 7.0 6.8 6.0 7.0 7.6Services 6.0 6.1 6.3 5.8 6.4 6.2 5.9 6.0 6.2

External (nominal)Exports (USD bn) 150.1 164.7 182.0 36.3 40.9 42.7 44.8 40.7 46.8Imports (USD bn) 149.3 167.2 181.4 39.0 42.5 41.4 44.3 42.5 46.3Trade balance (USD bn) 0.8 -2.5 0.6 -2.7 -1.6 1.3 0.5 -1.8 0.5

Current account bal (USD bn) 8.1 3.7 5.6 n.a. n.a. n.a. n.a. n.a. n.a.% of GDP 4.4 1.9 2.5 n.a. n.a. n.a. n.a. n.a. n.a.

InflationCPI inflation 4.1 1.3 3.5 0.7 1.0 1.3 2.3 3.4 3.8

OtherNominal GDP (USDbn) 186 200 220 n.a. n.a. n.a. n.a. n.a. n.a.Unemployment rate (%, sa, eop) 3.4 3.0 2.8 n.a. n.a. n.a. n.a. n.a. n.a.

- % change, year-on-year, unless otherwise specified- Figures may differ from official sources due to difference in reporting format

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June 11, 2015Vietnam

Disclaimer:The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a so-licitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.

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