July turned out to be the most difficult month of the year for Vietnamese equities. The VN Index declined 6.7% in USD, while the Kenno Vietnam Fund's net asset value declined 9.5% in USD and 10% in EUR. Not exactly what one would have expected.
Even as share prices declined, the companies in our portfolio delivered their strongest quarterly results in years. Their earnings grew by around 75% in the second quarter, led by Masan Group (MSN), FPT Retail (FRT), and Mobile World Group (MWG), whose net profits increased by 203%, 188%, and 100%, respectively. Phu Nhuan Jewelry (PNJ) was the only portfolio company for which we lowered our earnings forecast during the month, following a development that we discuss later in this commentary.
This growing gap between business performance and share prices makes July's decline particularly difficult to sit with. Valuations had already fallen significantly during the first half of the year, which included the market sell-off related to the conflict in the Middle East. July then brought a different pressure: the economy is growing faster than its domestic savings can support, creating a liquidity squeeze as banks compete for funding.
As this funding imbalance gradually eases, we see current valuations as one of the most attractive entry points into the Vietnamese equity market in the past decade. That does little to soften the experience for investors who are already invested, but it does put the recent returns into perspective and, more importantly, shapes how we think about the opportunity from here.
The VN Index fell as much as 10.2% during July before recovering around 3% in the final week. Very few stocks were spared, with the Vingroup names, including Vingroup JSC (VIC) and Vinhomes JSC (VHM), again the main exception. There was no single new piece of bad news behind the decline. Instead, we see two separate drivers, and it is worth considering them separately.
The first is the funding issue we described last month, which has now persisted for two quarters. In simple terms, the Vietnamese economy is growing faster than the domestic savings available to fund that growth. Credit grew 19% in 2025 and 7.7% year to date by the end of June, compared with deposit growth of 12% and 3%, respectively. To attract funding, banks have therefore had to offer 12-month deposit rates of around 8–9%.
At those rates, bank deposits become considerably more attractive relative to equities. Capital that might otherwise have flowed into risk assets is instead being drawn into the banking system, creating a natural headwind for asset prices. Put differently, the cost of capital has risen, and future cash flows are being discounted at higher rates, which helps explain why asset prices have moved sideways or down over the past six months even as company profits have continued to grow.
The second driver, once again, was leverage, and this is what turned a gradual decline into a sharp fall. Margin lending at brokerage firms had reached a record of more than USD 17 billion by the end of Q2/2026, equivalent to around 5% of total stock-market capitalization. Once prices began to fall, leveraged retail investors were forced to reduce positions. That selling pushed prices lower, triggering further deleveraging and creating a self-reinforcing cycle.
Foreign selling added further pressure. Foreign investors have net sold approximately USD 3.5 billion of Vietnamese equities so far this year, already a record amount and well above the USD 1.2 billion sold over the same period last year. Part of this reflects unexpected withdrawals from several large foreign funds. Because these funds tend to sell where liquidity is deepest, the pressure has been concentrated in larger companies. Many of these companies also sit at the core of Kenno’s portfolio, which amplified the impact on our performance.
We would not describe the deleveraging as completely finished, but a large part of the leverage that contributed to July’s decline has already been reduced. As the selling pressure has eased, the VN Index has recovered by around 2.4% from its July-end level, while Kenno’s portfolio has recovered by approximately 4.8% at the time of writing.
Excluding the Vingroup companies, we estimate that the VN Index now trades at around 9 times 2026 forward earnings. That is close to the cheapest it has been in the past decade and around 23% below its long-term average. On a price-to-book basis, the index is also only around 10% above its ten-year low.
The last time the market traded at comparable valuations was in 2022. The similarity in price is striking, but the circumstances are very different. In 2022, Vietnam was in the middle of a corporate bond crisis and the Van Thinh Phat fraud case at Saigon Commercial Bank. Investors were questioning the health of the financial system, and earnings were forecasted to fall. In that environment, a low valuation reflected a genuine deterioration in fundamentals.
Today, valuations are similar, but earnings are moving in the opposite direction. Our portfolio companies grew profits by around 75% in Q2/2026, continuing the strong momentum from the first quarter. In 2022, low valuations reflected problems in the businesses and the financial system. Today, we believe they primarily reflect the shortage of capital willing or able to buy financial assets.
The obvious question is why the market has not already closed that gap. Our answer is that the marginal buyers are constrained. Domestic investors can earn 8–9% on bank deposits, foreign funds are busy meeting redemptions, and leveraged investors have been forced to reduce positions. In other words, the issue is not that earnings are being questioned, but that too little capital is currently available to act on the valuation – this is a textbook case of prices falling when the supply of shares for sale materially exceeds the capital available to buy them.
Cheap valuations alone are not enough to make share prices recover. For the gap between prices and fundamentals to close, either the pressure on domestic liquidity needs to ease or new capital needs to enter the market. We see reasons for both to happen over time.
The important starting point is that the economy itself does not need to recover. It is already growing strongly. GDP increased 8.2% in the first half of 2026 (H1/2026), while retail sales grew 12.9%. For our portfolio, consumption matters particularly: incomes are rising, consumer confidence has improved, and we continue to see that in the volumes and pricing power of the companies we own. The issue is therefore not a lack of economic growth, but how that growth is being funded.
In the near term, public investment should help ease part of that imbalance. Disbursement rose 33% in H1/2026 but reached only around 35% of the full-year target, leaving a substantial amount still to be deployed. As that money moves out of the State Treasury and into construction companies, suppliers, and workers, part of it ultimately returns to the banking system as deposits. That helps replenish the pool of domestic funding that has been growing more slowly than credit.
There is also a structural change taking place in how that capital is deployed. Private companies are playing a much larger role in major infrastructure projects, which we believe should improve both execution and capital efficiency. We expect this to create investment opportunities of its own and are working on several ideas around the theme.
Over the longer term, Vietnam also needs more capital from outside the domestic banking system. This is where initiatives such as the Vietnam International Financial Center become relevant. The Ho Chi Minh City hub has already attracted more than USD 21 billion of investment commitments. Commitments are not the same as cash, and execution will determine how much ultimately enters the economy, but the direction is important: Vietnam increasingly needs to supplement domestic savings with offshore capital if it wants to sustain its current rate of investment and growth. We have set out our view in more detail here.
None of this suggests that the liquidity squeeze disappears overnight. But it does explain why we see the current situation as temporary rather than structural. The economy continues to grow, our companies continue to increase earnings, and there are identifiable channels through which the funding constraint can gradually ease. If that happens while valuations remain near decade lows, the conditions for a meaningful re-rating become increasingly favorable.
Phu Nhuan Jewelry (PNJ) had the biggest negative impact on the portfolio in July, reducing the Fund’s NAV by 3.8 percentage points. Its share price fell sharply after the former director of PNJ-Lab, the company’s gemstone-certification unit, was prosecuted in connection with a diamond-smuggling investigation.
Based on what has been disclosed so far, the allegations relate to individual conduct rather than evidence of a company-wide scheme. PNJ has stated that the diamonds involved did not enter its retail system and that its own diamonds are imported through official channels with proper documentation.
Even so, the incident matters because trust is fundamental to the jewelry business. Customer sellbacks increased sharply after the case became public, creating a short-term liquidity challenge. PNJ temporarily extended settlement periods to manage the surge in sellbacks, while continuing to honor its commitments and maintain access to credit lines.
We have been encouraged by management’s response. PNJ has communicated openly, increased oversight of PNJ-Lab, and brought in reputable international firms to review product quality and internal controls. The response so far has reinforced our confidence in the company’s broader governance, although the investigation remains ongoing.
There will still be a financial impact. Diamond sales may remain weak for some time, customer confidence will take time to recover, and some repurchased inventory may ultimately be sold at lower values.
For that reason, we reassessed the investment case rather than treating the share-price decline as simply an overreaction. We lowered our assumptions for near-term earnings and diamond demand, allowed for potential inventory losses, and applied a more conservative valuation. Even on that basis, our estimate of fair value remains approximately 30% above the current share price.
The reasons we originally invested in PNJ remain intact: a leading brand, a nationwide retail network, a strong balance sheet, and a competitive position that should strengthen as Vietnam’s jewelry market becomes more transparent and formalized. What has changed is the level of risk around the investment case.
We are therefore watching three things closely: the scope of the legal case, the trend in customer sellbacks, and PNJ’s follow-through on stronger internal controls. Based on what we know today, we believe the issue can be absorbed without permanently impairing the underlying business. If the situation improves, we believe the current valuation offers attractive upside. If it deteriorates, we will reassess the position.
MWG declined 9% in July along with other liquid names, but nothing changed for the worse inside the business. In fact, the outlook for Bach Hoa Xanh (BHX), the grocery chain and the main reason we hold this position, became more positive. BHX opened more than 630 stores in H1/2026 against a full-year target of 1,000, ahead of schedule, and management accelerated expansion because new stores are reaching store-level breakeven in three to four months rather than the 6–12 months we assumed. We now estimate that BHX will clear its remaining approximately USD 150 million of accumulated losses by early 2027, much earlier than we previously expected.
That timing matters because it opens the way to a separate listing. Vietnam's grocery market is still dominated by traditional traders, and as compliance costs rise with the formalization of the economy, market share should move towards organized retail. BHX is one of two chains positioned to capture that shift, and it is currently valued inside a group that the market prices primarily as an electronics retailer.
Dien May Xanh (DMX), the electronics chain representing 68% of the group's revenue, is having an excellent year. Revenue grew 30% in Q2/2026, and net margin reached a record, improving by 2.2 percentage points from a year earlier, with net profit up 80%. The heavy discounting that characterized this market has eased, and DMX is now in a stronger position to set prices. However, we do not expect this rate of growth to continue. Electronics demand is replacement-driven; some of this year's revenue reflects higher memory chip costs rather than volume, and around 38% of sales are made through installment plans arranged with finance companies that also operate in the tight funding environment described earlier. Our forecasts assume that DMX slows from 2027, which is why our estimate for group earnings growth is 26% a year through 2028 rather than anything close to this year's rate.
MWG trades at around 10 times our 2026 earnings estimate. On DMX alone, that would be a fair price for a strong year, and we think that is largely what the market is paying for. At the same time, it is paying very little for a grocery business that is becoming profitable at scale. We hold MWG for BHX, with DMX funding the group in the meantime. We are watching two things: whether BHX breakeven periods hold as the store base widens and expansion accelerates further, and whether consumer credit tightens enough to slow DMX. Our forecasts are unchanged, and we continue to hold the position at full weight.
MSN declined 8.3% in July along with the broader market. The change at Masan is not this quarter's growth rate, but the structure supporting it. Return on equity (ROE) has risen from 9% a year ago to around 18%, and we expect it to remain around this level over the longer term. Masan spent several years building retail and meat platforms that consumed capital faster than they produced it. Those platforms now increasingly fund themselves. The group has moved from consuming capital towards generating it, and that is what our forecasts rest on rather than any single quarter.
The clearest evidence is WinCommerce (WCM), the grocery chain representing 48% of the group's revenue. It opened a net 549 stores in H1/2026 against a full-year target of 1,500, and almost 90% of new stores now reach store-level breakeven within one quarter, based on our estimates. Expanding at that success rate no longer requires the same level of group capital, which is the key difference between today and three years ago. Vietnam's formalization supports this trend, as compliance costs rise for traditional traders and sales move towards organized retail.
Masan MEATLife (MML), representing 11% of the group’s revenue, shows the same shift. Branded chilled meat sales grew 15% and processed meat sales grew 39% in Q2/2026, while operating profit rose 126% even though average live hog prices were 9% lower than a year earlier. That is the fourth consecutive quarter of falling hog prices and rising profit. MML is starting to behave more like a branded consumer business than a commodity producer, which should mean steadier earnings and, over time, a higher valuation. We also hold MML directly, so our exposure to it is larger than the MSN weight alone suggests.
Masan Consumer (MCH), representing 37% of the group’s revenue, grew its net profit by 11%, in line with our forecast. It remains the business that funds the others while continuing to move its brands upmarket.
All in all, group revenue grew 54% and net profit tripled, both slightly ahead of our forecast, with retail and consumer businesses accounting for most of the revenue increase. We maintain our estimates of around 70% earnings growth this year and 33% annual growth through 2028.
MSN trades at around 14 times our 2026 earnings estimate, and we believe the businesses are worth considerably more when valued separately, for reasons we have set out before. We do not think the market doubts these earnings. Rather, the shortage of capital described earlier is limiting the number of investors able to act on them. That constraint should begin to ease on 21 September, when Vietnam enters the FTSE emerging market indices, and MSN is expected to be included. Buying from index funds is mechanical rather than discretionary, and in a market this short of capital, even relatively modest inflows could matter.
July’s sell-off created some of the most attractive valuations we have seen in Vietnam for almost a decade. In the short term, as we observed in July, markets can move sharply because of liquidity pressure, leverage, and forced selling. Over the longer term, however, share prices should ultimately reflect the earnings power and value of the underlying businesses. That belief has always been our north star, and we continue to believe that, over time, fundamentals will prevail.
We believe the market has become too pessimistic. Most of our portfolio companies continue to deliver strong operating results, while their share prices have fallen to valuation levels we have rarely seen over the past ten years. Even in PNJ’s case, where the near-term uncertainty is real, we believe the current price already reflects a very bearish scenario.
Of course, none of this means that the recovery will be immediate, and the year-to-date return may remain disappointing in the coming months. But as long as the underlying businesses continue to create shareholder value and the investment cases remain intact, lower prices increase the upside potential of the portfolio. That is how we view the situation today, and why we remain confident in the portfolio despite being frustrated of the recent returns.