Vietnam: a Spectacular Emerging Economy

Taken from On Target 263

Crossing a main street in a Vietnamese city is unnerving. As you follow the tourist guide advice, ignoring traffic risk as you step out, boldly striding forward at a steady pace, you are engulfed by a torrent of motorcycles. They swerve as they sweep past you, never touching you.

It’s a breathtaking experience that captures the spirit of a nation charging forward to claim the title as Asia’s most spectacularly successful emerging economy.

Not long ago Vietnam was one of the world’s poorest countries. Now it has one of the fastest-growing middle classes. They constitute 13 per cent of the total population, and that proportion is expected to double in just five years’ time. Exports have been growing so strongly that the US administration has threatened to penalize its trade.

The country is predicted to achieve the best economic growth in Asia – more than 6 per cent annual average – over the next few years. It is, says one analyst, “on track to become the second-largest manufacturing country in the world after China.”

MultinationaIs seeking to cut their China-dependent supply chains are pouring in. Last year, despite Vietnam’s savage and highly successful borders shutdown to fight the pandemic, more than $18 billion of foreign direct investment arrived. Half the inflows are going into manufacturing — new factories and research facilities for major electronics firms such as Foxconn, Samsung, Qualcomm, Pegatron and Wistron. Others such as Apple, Uniqlo and Lotte are looking for local partners.

The nation’s transformation began in 1986 when its Communist dictatorship decided to follow the example of neighbour China, allowing incentives to be shaped by market forces, private ownership and foreign capital. It offered generous tax breaks to foreign companies attracted by low wage costs.

The first major company to capitalize on the opening-up was the South Korean titan Samsung Electronics. It has been extraordinarily successful. It now makes in Vietnam about half the mobile phones it sells worldwide. By 2018 its subsidiaries there employed 100,000 workers and accounted for a quarter of the nation’s exports.

In recent years Vietnam has strengthened its international ties by signing up for important free trade deals with the European Union, the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership. However the US is its biggest export market, taking a quarter of shipments.

The escalating trade conflict between America and China, and the way the pandemic has exposed the risks of dependence on China for strategic supplies, is encouraging multinationals to consider developing Vietnam as an alternative source. However, there are significant obstacles.

Although Vietnam has a large, energetic and well-educated work force, expanding at a million every year, it lacks the abundance of high-level technical and managerial skills readily available in China. And its labour is no longer cheap compared to neighbouring peers’.

Its economy is still far too small to allow the development of intermediate industries. Vietnam does not have the vast galaxies of companies churning out specialized components and materials like those that manufacturers can call upon in China. Land can be expensive. Ready-to-use factories and warehouses are in short supply. Infrastructure is insufficient to support a major new wave of business growth.

Nevertheless, Vietnam has become increasingly attractive to international businesses.

Its economy is soundly managed — it was only one of perhaps a dozen countries to achieve growth last year. Its currency, the dong, is kept in a stable relationship with the US dollar. Inflation is low… 3 to 4 per cent. Interest rates are low, too – the ten-year government bond trades on a yield of about 2.3 per cent. It has a high current account (foreign trade) surplus. Its legal framework has been reshaped by the passing of new laws governing financial securities, business enterprises and public/private partnerships. Local consumer demand is picking up strongly.

There is growing international interest in investing in its listed shares despite limits on what foreigners can buy. As the pool of those they’re allowed to hold is effectively fixed, virtually all companies they’re likely to favour have to be traded among themselves, cannot be bought from domestic investors. Nevertheless Vietnam has grown to become the biggest single constituent of the MSCI frontier markets index.

The shares are ‘still quite attractive’

There is a handful of country funds available to international investors: a US ETF, Van Eck Vectors Vietnam; the long-established London-listed closed-end fund Vietnam Enterprise Investments; Hong Kong-based Asia Frontier Capital’s Vietnam Fund (favoured by well-known adviser Marc Faber).

Its Thomas Hugger says the Vietnamese market is “still quite attractive” with a price/earnings ratio of 17.6 compared to local Asian peers’ Singapore (21), Malaysia (23), Thailand (24.7), Philippines (28.4) and Indonesia (28.5). At the end of last month his Vietnam Fund’s largest positions were: Agriculture Bank Insurance, VNDirect Securities (an on-line brokerage), the LienViet bank and the Dinh Vu port owner and operator. It delivered growth of almost 28 per cent last year. 

Bangkok-based NTAsset manager doesn’t offer an exclusively-Vietnam fund but does have the highest proportion of its regional small-cap Discovery unit in Vietnamese shares. Its favourites include Mobile World, a consumer play focused on electronic goods and groceries; the leading jewellery retailer Phu Nhuan; infotech’s FPT (software outsourcing, broadband, cloud); the affordable housing developer Nam Long; Binh Minh Plastic (PVC piping); airfreight terminal operator Saigon Cargo Services.

The fund’s Kenneth Ng says Vietnam is “one of the most attractive markets” in the region in terms of valuation. Earnings growth is expected to be greater than 20 per cent this year and stocks are “particularly inexpensive” on a growth-adjusted basis. For its Vietnamese portfolio NTAsset is looking at a price/earnings ratio of 10.2 times for this year and earnings growth of 33 per cent.

Domestic investors have become increasingly important drivers of the market as the new middle class see equities as a “proven asset class to park their ever-increasing wealth.” The strong performance of small- and mid-cap stocks last year lured a record number of new local investors into the market.

Vietnam: a Spectacular Emerging Economy taken from our ‘On Target Newsletter’ issue no 262