In August, the Kenno Vietnam Fund's net asset value rose 9.2% in USD and 8.1% in EUR, compared with a 6.3% gain in USD for the VN Index. The largest contributor was Phu Nhuan Jewelry JSC (PNJ), which rose 36% after the police investigation reached a preliminary conclusion and removed the biggest risk that had driven its fall in July. FPT Retail (FRT) also continued to perform well, rising 17.3% after strong second-quarter results, following its position as our best performer in July. Both moves were driven by company-specific developments we were waiting to see, rather than from the market lifting everything.
Last month, we wrote that the fall was about funding in an economy growing too fast for its own savings, and that we were not calling an end to it. We still are not. What has changed is that money is beginning to return to the formal system, including in areas that do not show up clearly in the headline numbers. At the same time, FTSE Russell set Vietnam's index weighting nearly 50% higher than expected, which gives investors a clearer sense of both the timing and scale of the foreign buying that has been absent for the past two years.
In short, prices turned in August because the pressure that drove July's decline has started to ease. This is still the beginning of the improvement, not the end of it, and we believe there is more room for that recovery to come through in both liquidity and the companies we own.
Market Overview
A broader recovery, with money slowly returning to the system
The VN Index rose 6.3% in August, recovering much of the previous month's decline. What mattered more than the size of the move was how many stocks took part in it. Earlier rallies this year were driven mainly by the Vingroup companies, with limited participation elsewhere. This one was different, with buying spread across companies that reported strong first-half earnings and had fallen to low valuations. In our view, the July sell-off overshot, as we said at the time, and August was the correction of that.
The larger question is whether anything improved underneath the price. The funding shortage we have discussed in recent months has not gone away, but we are seeing the first signs that the pressure is easing. These signs are not obvious from the headline numbers, so they are worth setting out.
The first is inside the banking system. Deposit growth has been accelerating for several months as banks have kept deposit rates attractive, while credit is still growing but no longer running as hot, and lending to real estate remains tightly controlled. The clearest way to see this is the system's loan-to-deposit ratio, which has eased from 118% at the end of June to around 116% today, based on the State Bank of Vietnam’s data and our estimates. In plain terms, banks are still lending out more than they take in through deposits, but the imbalance has stopped widening. The move is small, and against a ratio that has been elevated for two years, we would not read too much into two months. What matters is the direction, which has now changed for the first time in this cycle.
The second sign is unusual enough that we want to explain it carefully. In Vietnam, the official exchange rate quoted by banks normally sits below the rate available in the informal market, because some demand for dollars cannot be met through official channels. For the first time, that has reversed, and the informal rate is now below the bank rate. We read this as an early sign that money, which had been leaving the economy outside the formal system, is starting to come back. Gold smuggling, unofficial small-scale imports, and transfers through cryptocurrency have all come under tighter control this year.
The third sign is gold. The gap between domestic and global gold prices has narrowed to its lowest level in over seven years, approaching 0%. It once reached 30% and stayed in double digits for a long period. Part of that came from restricted official supply, but it also reflected how much physical gold Vietnamese households were holding, which is money sitting outside the financial system. The gap closing suggests that behavior is starting to reverse, helped by deposit rates that now compete for that money and by tighter rules on gold trading, which require transactions to be in the buyer's own name, settled through a bank, properly invoiced, and taxed on transfer.
These are early signals rather than confirmation, so it is worth saying how we will know whether we are right. The measure we watch is net errors and omissions in the balance of payments, which broadly captures money movements that are not recorded elsewhere. Since 2022, the trailing twelve-month figure has run at around USD 25 to 30 billion, or roughly 5% of the size of the economy, against under USD 10 billion in earlier years. That is a large amount of money leaving the system, and it has weighed on both liquidity and the currency. The measure is imprecise and reports with a lag, so it will not tell us anything this month. But if what we are seeing is real, it should start to improve in the coming readings, and if it does not, we will have to revisit this view.
Two things have not changed, and we do not want to leave them unsaid. Interest rates remain high, and the level of margin lending in the market remains something we monitor closely after July, when forced selling made the decline worse than the news warranted. Credit is also more selective than before. It is being directed toward areas that raise the economy's long-term productive capacity, including infrastructure, manufacturing, and processing, and banks have been asked to lower lending rates for small and medium-sized businesses and for those priority sectors. This is funding aimed at improving the real economy rather than at supporting asset prices. In our view, that is the better outcome for the companies we own, because it reaches their earnings before it reaches their share prices.
A stronger-than-expected announcement from FTSE
The other support for the market last month came from FTSE Russell, which confirmed Vietnam's weighting and the individual stocks that will be added to its indices.
Vietnam's weight in the FTSE Emerging All Cap Index was raised to 0.49%, from the 0.329% announced in April, an increase of around 50%. That lifts the estimated passive money flowing into Vietnam through these indices over the next twelve months to USD 3 billion, from USD 2 billion previously, according to Vietcap estimates. FTSE Russell will phase the inclusion across four tranches of 10%, 20%, 35%, and 35%, reaching full inclusion by September 2027. For context, foreign investors have sold around USD 3.6 billion of Vietnamese equities in the first eight months of this year. The comparison is not exact, because the selling is behind us and the buying is ahead of us, and foreign investors may keep selling while the index money arrives. But it gives a sense of scale, and it is the first time in two years that a buyer of that size has been visible.
Passive buying is also mechanical. Index funds buy on the schedule, regardless of their view of the price, which makes it different from a forecast of investor sentiment. Within our portfolio, Masan Group (MSN) and FPT Corporation (FPT) benefit most directly, each accounting for around 3 to 4% of Vietnam's weighting in the FTSE indices, which we estimate works out at roughly USD 100 million of buying in each name spread over twelve months.
We would not overstate the immediate effect. That money arrives in phases rather than on one day, and USD 100 million is a few days of normal trading volume in these stocks. What matters more is what tends to follow. Active managers are not required to buy on any schedule, but an emerging market classification puts Vietnam into the universe of funds that could not previously look at it, and those pools of capital are considerably larger than the passive flows.
Beyond September, the reform program continues. The State Securities Commission plans to launch a central counterparty clearing system in the first quarter of 2027, which should reduce settlement risk for foreign investors and complete the shift away from requiring them to fund trades in advance. Listed companies are being phased into English-language disclosure between 2025 and 2028, and the Government's roadmap also includes omnibus trading accounts and, at a later stage, easing the limits on how much of a company foreign investors may own.
We should be straightforward about where this leads. MSCI, the other major index provider, reviewed Vietnam in June and did not add it to its watchlist, citing foreign ownership limits that affect more than 10% of the market and the fact that the clearing system is not yet running. The next review comes in 2027, and a watchlist period normally lasts two to three years before any upgrade, so an MSCI classification is more likely a target for around 2030 than something close at hand. We prefer to say that plainly. For our clients, the key point is not the next announcement date. It is that Vietnam now has an approved reform plan with clear milestones, and each one delivered widens the pool of investors able to own the companies we own.
Policy reaching our companies?
The first policy change is state-owned enterprise reform, which is no longer only a direction of travel and now has a legal framework behind it. Decree 57, effective in February 2026, set the rules for restructuring state capital in enterprises. Prime Minister's Decision 40, effective 5 August, then sorted industries into three groups according to how much state ownership is required. Ministries, agencies, and local governments had to complete their capital restructuring plans for 2026 – 2030 by the end of August. The objective is not simply to reduce the state's role. It is to put the state capital where it earns a better return. In that context, the State Capital Investment Corporation (SCIC), the state's investment arm, is being repositioned from a passive holder of assets into a professional capital manager.
For our portfolio, this matters most for Traphaco (TRA). SCIC's ownership has long been the main constraint on the company. A large stake held passively has limited both strategic decision-making and the number of shares available to other investors, and it has had real consequences for the business. Traphaco's planned factory, built to European pharmaceutical manufacturing standards and therefore capable of producing higher-value medicines, has been delayed several times, and operating efficiency has not improved as far as it should have when one of the largest shareholders takes no active role. We do not need to assume a sale of the stake. What we expect is a more engaged owner, one judged on the return it earns on state capital rather than on whether it continues to hold the asset, and that alone should remove part of the discount TRA has carried. Any move on the stake itself would be upside rather than our base case.
The second policy change is the combination of tax relief and cheaper credit for smaller businesses. On 24 August, the National Assembly adopted a 30% reduction in corporate income tax for the 2026 and 2027 tax years, applied to tax payable after existing incentives, for companies and resident business individuals with annual revenue of no more than VND 10 billion (or around USD 380,000). This follows Decree 20 in January, which exempts newly registered small and medium-sized enterprises from corporate income tax for their first three years, and the removal this year of the lump-sum tax regime for household businesses. Banks have also been asked to lower lending rates for smaller companies and priority sectors.
Taken together, these measures are designed to bring business activity out of the informal economy and into the formal one, and that connects back to the liquidity picture from a different direction. When a household business registers, issues invoices, and puts its revenue through the banking system, that cash stays inside the financial system rather than sitting in a drawer. It also becomes easier for banks to lend to that business and easier for companies to understand and serve that customer. For us, this second effect matters more than the tax saving itself. Better formalization should improve how money circulates and support spending among the middle-income customers our consumer holdings serve. It will not show up in a single quarter, but it points in the same direction as everything else we have described this month.
Portfolio Updates
In August, we joined Vietcap Securities' post-results company tour, meeting management at several businesses after their first-half results, including some of our holdings. Three things came out of it that changed or confirmed our thinking.
The most useful was at Hoa Phat Agriculture, one of Vietnam's most efficient livestock operators, where management explained why they expect live hog prices to fall over time. Production is moving from small farms to larger commercial operations that control disease better and supply more steadily, and the high prices of recent years have drawn new capacity in. We agree. China went through the same consolidation after African swine fever, and Chinese hog prices reached an eight-year low in March 2026, around 28% below a year earlier and now roughly 30 – 40% below Vietnamese prices. Vietnamese prices hit their low for the year in August as supply increased.
This cuts both ways for Masan MEATLife (MML), our portfolio company, and we want to be clear about that. Cheaper hogs lower the input cost for the branded meat business, which is where the value is being created. They also reduce the value of what MML produces on its own farms. On our numbers, the branded business is now large enough that the first effect outweighs the second, with fresh and processed meat expected to account for 82% of revenue this year, up from 68% three years ago. In other words, MML is becoming a branded consumer business rather than a producer of a commodity, with steadier earnings and, over time, a higher valuation that reflects that.
The second was FPT Corporation (FPT), where the Japanese business continues to do well. Revenue in Japan grew 29% in yen terms over the first seven months of 2026, and Japan is now close to half of FPT's global technology services revenue. Management's view is that this is structural rather than a temporary trend, as Japanese companies still have old systems to replace, they are spending more on security, they are short of local engineers, and outsourcing work is moving away from China. That fits what FPT has built there and supports its target of USD 1 billion of Japanese revenue by 2027, against more than USD 500 million in 2024. The comparison worth making is with the large Indian technology firms, several of which have slowed as clients postpone less urgent work. FPT's Japanese business has held up better. For that reason, we continue to expect the company’s earnings growth of 16 – 17% a year over the next three years.
The third was a company we do not own. We have been working through the recent Vietnamese listings, and the one we looked at this month is DatVietVAC, the country's largest media and entertainment group, which produces many of Vietnam's most-watched shows and holds around 27% of the television advertising market in the first half of 2026. It is expected to earn a return on equity of around 35% this year, which is unusual for a media business. That is partly because DatVietVAC runs an asset-light model, with most of the value coming from creating and owning content, selling advertising, and monetizing programming rights, rather than from heavy investment in physical assets. Two questions decide whether we go further: whether hit shows can be produced consistently rather than occasionally, and what a library of programming rights is actually worth. We have not answered either yet.
Below, we highlight investment cases that illustrate our portfolio management activities during the month.
Phu Nhuan Jewelry (PNJ): Consumer Discretionary | 6.5% weight | +36% MTD
PNJ rose 36% in August after the police investigation into the diamond case reached a preliminary conclusion. It remains 33% below where it stood before the case broke, so this is a partial recovery rather than a round trip. We think the market has repriced the legal risk correctly and has not yet repriced the business.
The findings addressed the three things we said in July that we were waiting on. Thanh Hoa police stated that PNJ held complete import documentation for its diamonds and that its import and distribution processes were properly controlled. The alleged wrongdoing was treated as the actions of individuals rather than the company, and no smuggled goods entered PNJ's retail network, though two employees of its wholly owned certification subsidiary remain accused. Because the case was not escalated to the company, PNJ can operate normally. The risk we were most concerned about, lasting damage to a brand built on trust, now looks smaller than it did.
PNJ reported a second-quarter loss because it booked provisions for the case early, ahead of the quarter in which the events occurred. The provision of around USD 47 million covers expected losses on items bought back from customers, mostly loose diamonds, together with a partial write-down of inventory. That produced a net loss of about USD 11 million against a profit of USD 17 million a year earlier. Worth noting is what that arithmetic implies: the provision is larger than the swing in reported profit, so the underlying business earned more than it did last year. Revenue still grew 49% in the first half, and retail sales per store grew 14%.
We expect 2026 earnings to fall 45% because of the provisions, revised from our previous estimate of 33% growth, and a recovery of 88% in 2027 as the business normalizes. Buyback volumes are likely to keep falling now that the investigation has concluded, and part of the provision may be released, though we do not count on that. Management has appointed independent international firms to verify product quality, review the diamond process end-to-end, and assess risk management, which is the response we would want to see.
FPT Retail (FRT): Healthcare & Discretionary | 11.6% weight | +17.3% MTD
FPT Retail (FRT) rose 17.3% in August, supported by a strong Q2/2026 result that exceeded our expectations. We expect this growth to continue: Long Chau is taking share from traditional pharmacies as compliance rules tighten, while its expanding network is helping it operate more efficiently.
In Q2/2026, Long Chau increased the number of pharmacies by 20% year-over-year (YoY), while revenue per store rose 10%, its strongest growth in the past two years. Part of this comes from smaller traditional pharmacies losing share, as many do not yet have the systems, processes, or trained staff needed to meet tighter rules. Recent changes have also worked in Long Chau’s favor, including the nationwide rollout of e-prescriptions and higher penalties for pharmacies that sell prescription drugs without a valid prescription, sell supplements with unclear origins, or misuse pharmaceutical practice certificates. Enforcement is still early, but we expect it to become stricter over time, which should continue to favor larger and more compliant chains.
Long Chau’s profitability also improved. We estimate its net margin rose from 2.3% in Q2/2025 to 4.0% in Q2/2026, the highest level in its history. There are two main reasons. First, as the network gets larger, Long Chau can buy in bigger volumes and negotiate better terms with suppliers. Second, existing stores are still growing sales, which helps spread fixed costs over a larger revenue base. We expect both benefits to continue as the network expands and newer stores mature.
The vaccination business is also progressing, with revenue per vaccination center up around 30% from a year earlier. Part of this was seasonal, but it also reflects rising awareness as the government puts more focus on preventive healthcare. In May, the national immunization program was expanded to include HPV and pneumococcal vaccines, two of Long Chau’s core offerings. At first, a broader public vaccination program may sound negative for private providers. In Vietnam, we think it is more likely to grow the market. The main issue is still awareness, not only affordability. According to the Vietnam Association of Preventive Medicine, only about 1% of adults in Vietnam are vaccinated against the flu, compared with 34% in Thailand and 64% in Korea. As more households understand the value of prevention, they are more likely to consider vaccine choice, brand trust, service quality, and convenience, areas where Long Chau can compete.
Given the stronger margins and better store economics, we raise our 2026 earnings growth forecast from 43% to 70%, and our expected compound annual earnings growth (CAGR) over the next three years from 36% to 43%. At around 19 times our 2026 earnings estimate, we still find FRT reasonably valued for a business growing at this pace.
Closing Remarks
August was a good recovery, but it still leaves the market well below the value we see in our companies. Our portfolio companies are on track to grow earnings by around 45% this year, yet they trade at only about 11 times those earnings. If they deliver that growth and valuations move back just to their ten-year average, the potential return is already around 40%, even before any broader improvement in investor confidence.
We do not want to overstate the case. Interest rates are still high, and the funding pressure has not been fully resolved. But the direction has improved. Money that had moved outside Vietnam’s formal financial system is starting to return. Foreign buying linked to the index upgrade now has a clear timetable from September. Most importantly, the businesses we own continued to grow through both the sell-off and the recovery. That is the kind of resilience we look for, and it is why we are staying invested.
