The Vietnam war, fought over 20 years to 1975, devastated the country, leaving 4 million Vietnamese dead. It has taken the country decades to rebuild itself - with plenty of bumps along the way.
Hard lessons were learnt from the overheating of Vietnam’s economy in the late 2000s, says Brook Tellwright, manager of the Waverton Southeast Asian fund. Since then, though, “the macro economic and monetary policy management have been much better managed”.
Vietnam’s economy today is one of the fastest-growing and most vibrant in the world. GDP grew at 7% in 2018, with similar growth forecast for 2019.
Some investors question the accuracy of this data, but Sat Duhra, co-manager of Henderson Far East Income (HFEL), says most of the companies he meets are growing at around 30-40%. “You can, therefore, believe that, unlike India, this economy is genuinely growing at about 7%,” he says.
Demographics are extremely favourable, too. Around two-thirds of Vietnamese are under the age of 35 – a product of the baby boomer generation that were born in the aftermath of the war.
Around half the population is of working age. Wages are on a steep upward curve but are still low enough – labour costs are around a third that of China – to tempt foreign institutions to the country.
“Once they come to Vietnam, they get addicted to the drug and the drug’s called cheap labour,” says Andy Ho, chief investment officer at VinaCapital.
The Next Emerging Market
Vietnam gets foreign direct investment (FDI) disbursements of around $15 million per year. Samsung, for example, makes most of its smartphones in Vietnam, while Intel’s largest factory outside the US is in Vietnam.
As trade tariffs continue to bite, Chinese firms are increasingly looking to re-locate to their closest neighbour, too. It’s not reliant on China, though, which is positive. The three biggest contributors to FDI are Korea, Japan and Singapore.
Emily Fletcher, co-manager of BlackRock Frontiers (BRFI), argues that it is this FDI, and the export growth it brings with it, that is driving Vietnam’s economy. As long as FDI continues to grow, she adds, so will Vietnam’s economy.
Its geography is very good as well, says Robert Horrocks, chief investment officer at Matthews Asia. “The coastline has lots of deep-water ports that can link it up by sea to the global financial system, by rail and expressways to the rest of SE Asia and into China and obviously by air.”
The reforms the Communist Government has overseen in Vietnam are impressive. As opposed to most world regions, its politics are incredibly stable, inflation is low at around 3% and the currency is stable, as well.
That’s a product of the country’s vast trade surplus, particularly with the US. Further, while it borrows 65% of GDP, it mainly borrows from local investors, rather than the US. As a result, the Vietnamese dong depreciated just 2% in 2018.
“The economy is just in great shape,” says Bill Stoops, chief investment officer at Dragon Capital. “If you compare it with most of its emerging market peers, you’d have to say it’s almost the best economy out there.”
Despite that final comment, Vietnam is still categorised by MSCI as a frontier market. True, it should be the next country to step up to emerging status, but the ascension won’t start until mid-2019 at the earliest. Once that process has begun, it will take a couple of years to finalise.
The changes seen in Vietnam’s economy can be summed up in its food production evolution. Not much more than a decade ago, explains Ho, Vietnam imported almost all the food its citizens consumed.
Today, Vietnam is in the top two exporters of rice and coffee and exports a lot of seafood worldwide, mainly to China and Hong Kong.
Synergies gained for consumers through businesses, meanwhile, can be exampled in travel. The London-listed VinaCapital Vietnam Opportunity Fund (VOF) invests in Vietjet, the leading airline in Vietnam. Previously, it took two days and cost $150 to get from the North of the country to the South.
Now, a Vietjet flight still costs $150 but takes just two hours. “To me, they’re not selling a ticket, they’re selling time,” says Ho. “They’re not undercutting anyone, but they’re giving you 34 hours of your life back.”
Hurdles to Overcome Before Emerging Status
The stock market is growing fast, too. It has an extremely high market-cap-to-GDP ratio and good daily trading volume, says Stoops. Duhra, meanwhile, notes that billions of dollars were raised through rights issues, IPOs and other capital market activity in 2018.
Further, in the next two years, the Government wants to privatise 400 state-owned enterprises. This should make it a more liquid market. Inclusion in the MSCI Emerging Markets Index would lead to significant inflows from ETFs into the market, also.
Given these positive sentiments, allocating a portion of an investors’ portfolio towards Vietnam must be a no-brainer. There are worries, though.
A potential slowdown in global exports is one. “The challenge for Vietnam is what the outside world is going to throw at it,” says Stoops. “We don’t yet know how these complications of trade wars is going to affect the economy.”
Indeed, Vietnam has the fourth largest trade deficit with the United States, although most think it’s too small a fish to bother US President Donald Trump. If he tried to place tariffs on Vietnamese exports, he would likely have a very angry CEO of Intel, for instance, banging on the White House door, notes Horrocks.
Another hurdle it needs to overcome – especially before it can even be considered for an emerging market upgrade – is its limits on foreign ownership. Many of the more investible companies in Vietnam are currently at their limits with regards foreign ownership.
“This is one of the few structural problems that exit in Vietnam,” explains Tellwright, adding that even registering as a foreign investor in Vietnam is a laborious process.
While these limits can be lifted at any point, Fletcher thinks the country feels as though doing so would amount to giving up their sovereignty. “It think that makes it a politically difficult one to overcome.”
As a result of this, foreigners looking to invest in many of the larger companies have to purchase stock from fellow foreigners, notes Duhra. This tends to come at a meaty premium. As a result, his fund, which is co-run by Mike Kerley, invests in VinaCapital Vietnam Opportunity.
“A s a foreigner buying some of these individual shares you can pay up to a 20% premium for it yet you can buy the closed-end investment trust at a 20% discount and with a 3% yield,” Kerley explains.
Investment Opportunities
The VN Index was one of the strongest performers in 2017, with its 48% rise more than double that of the MSCI World. Last year was tougher and its near-10% decline was worse than the broader index, though less than MSCI EM at almost 15%.
“That’s left a lot of stocks that we’re interested in and that are on our watchlist looking very attractively valued,” says Tellwright.
The market, adds Stoops, is currently trading on around 12 times earnings for 10.6% earnings growth this year. A price/earnings-to-growth ratio of 1.1 times makes it "very cheap versus its peers".
The VinaCapital fund is differentiated due to its focus on private, unlisted companies. It invests in hospitals, schools, banks and food firms with the target of helping them grow and, ultimately, listing them on the stock market or exiting through an acquisition.
From an investment perspective, the same themes crop up. With its favourable demographics and rising wages comes an emerging middle class, which are now moving from their rural homes to big cities.
Once they get there, they need to buy things, says Ho. “You need to buy food and beverages, a home, clothes, a motorbike, you need to have healthcare, banking services. All these are basic needs and we like to invest in sectors that provide those needs.”
Stoops agrees and one of the largest holdings in his Vietnam Enterprise Investments (VEIL) fund is Mobile World, one of the biggest retailers in the country. It mainly sells electronic equipment but is looking to branch out onto supermarkets.
He also has a big weighting in banks, with Asia Commercial Bank and Military Bank top 10 holdings. “They both have great earnings growth of 20% this year, a return on equity of 25% and trade on 1.4 times price/book. If they can get their act together in terms of governance, it’s a no-brainer.”
The FDI brings investment opportunities, too. Ngo The Trieu, CEO and CIO of Eastspring Vietnam, likes industrial parks, textile and garment makers and software outsourcing firms.
For UK retail investors, both VOF and VEIL provide pure-play ways to gain access to Vietnam, with one London-listed ETF available that tracks the FTSE Vietnam Index: Xtrackers FTSE Vietnam Swap (XFVT).
For a more diversified offering, Aberdeen Frontier Markets (AFMC) has around 20% in Vietnam, with T. Rowe Price Frontier Markets, East Capital Global Frontier Markets, Barings Frontier Markets and Baillie Gifford Pacific all having between 13-16% exposure.
Of Morningstar’s top picks, the Bronze rated pair of Templeton Emerging Markets Smaller Companies and Mirae Asset Asia Select Leaders Equity funds have 5% and 3% respectively.
