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Is 2020 the year to invest in Vietnam?

By Marianne Curphey

Vietnam could be an attractive prospect this year, but much depends on the outcome of US-China trade talks

Vietnam has come a long way in a short time. According to the World Bank, Vietnam’s shift to a market economy has transformed it from one of the poorest in the world into a lower middle-income country. Vietnam now is one of the most dynamic emerging countries in the East Asia region. So is now the right time to consider an investment in Vietnam?

“Vietnam has made huge strides in its development and its transformation had not gone unnoticed,” says Ngo The Trieu, chief executive officer and chief investment officer at Eastspring Vietnam. “In 2017, Vietnam was Asia’s top performing stock market. In 2018, it was one of the only two stock markets (besides China) in Asia to enjoy net foreign portfolio inflows.”

Reforms making a difference

Over the medium term, the World Bank believes Vietnam’s economic outlook is positive. After peaking at 7.1 per cent in 2018, real GDP growth is projected to remain at around 6.5 per cent in 2020 and 2021. Annual headline inflation has been stable for the seven consecutive years – at 4 per cent and below in recent years.

“Economic and political reforms under Đổi Mới, launched in 1986, have spurred rapid economic growth,” its report says. Between 2002 and 2018, more than 45 million people were lifted out of poverty.”

As a result, Vietnam is experiencing rapid demographic and social change.

“Its population reached 97 million in 2018 (up from about 60 million in 1986) and is expected to expand to 120 million before moderating around 2050,” the World Bank says. Today, 70 per cent of the population is under 35 years of age, with a life expectancy of 76 years, the highest among countries in the region at similar income levels. An emerging middle class, currently accounting for 13 per cent of the population, is expected to reach 26 per cent by 2026. Vietnam ranks 48 out of 157 countries on the human capital index (HCI), second in ASEAN behind Singapore.

Attracting foreign investment

By embracing trade liberalisation alongside policies which fostered sweeping domestic reforms, Vietnam has been able to dramatically reduce the cost of doing business and encourage massive amounts of foreign investment, says Michael Born, senior investment analyst at EQ Investors.

"Considering the population remains young (50 per cent were under 35) and the wage level remains low, it is not surprising to see business booming in Vietnam, where 1.5 million new manufacturing jobs were added from 2014-2016 and an estimated one in 10 smartphones are produced in the country," he says.

As in many other Asian countries, the surge in manufacturing has resulted in significant growth of the middle class, the population of which is forecast to double to 33 million from 2014-2020 (source: Boston Consulting Group). Poverty rates declined from 70 per cent to less than 6 per cent from 2002-2018, whilst the number of Vietnamese millionaires tripled.

"However, unlike other countries in SE Asia, such as Thailand or Indonesia, the penetration of key products and services such as dairy goods, life insurance and credit cards is much lower," he says. "As such modern conveniences are universally desirable, with such items near the top of aspirational shopping lists, we should see this significant propensity to consumer to continue, further driving growth."

Does Vietnam have particular challenges or advantages?

As of 2018, Vietnam (together with Singapore) held the most bilateral and multilateral free trade agreements in Asia, and the average tariff on manufactured items fell from 16 per cent in 2000 to around 2 per cent in 2017.

"Whilst global trade has largely stagnated, Vietnam’s trade has increased from 70 per cent in 2007 to 190 per cent in 2017 as a result of the competitive environment (source: Brookings), resulting in a vibrant and dynamic economy," Michael Born says.

Since the start of its trade conflict with the US, Chinese production has continued to move “offshore” into SE Asia, and Vietnam is well-positioned geographically to take advantage. Although this trend was well underway prior to the start of the Trump administration, as the cost of production in China had risen on the back of inflating property prices and wages, there has been a dramatic increase as tensions increasingly look set to remain. Exports of electronic goods to the US rose 76 per cent over the 12 million to November 2019, which has been a major driver of growth in the country.

That being said, issues like corruption still pervade more rural parts of the country, and the rapid growth and industrialisation have come at a cost to the environment, he says.

"Although energy and water consumption have tripled over the past decade, production has not kept pace, resulting in unsustainable practices which cause long-term damage to natural resources like timber and fisheries. Meanwhile, strong urbanisation and population growth have resulted in significant waste management and pollution challenges.

"Furthermore, Vietnam’s dependence on foreign trade makes the economy sensitive to policy shocks and geopolitical tensions, whilst inflation rose sharply, to an annualised rate of 5.2 per cent (as of December 2019) although this is largely attributable to the sharp increase in pork prices as a result of the Asian swine flu epidemic."

A country transformed

For an economy that had been largely dependent on agriculture, economic growth is now being led by services and industrial activity, says Ngo The Trieu of Eastspring.

“At a time when trade protectionism in some parts of the world appears to be on the rise, trade has been key in transforming the Vietnamese economy,” he says. Exports have grown more than one hundredfold since 1986 with electronics and footwear accounting for more than 40 per cent of the country’s total exports.

According to Fitch Solutions, the country’s stability and good connectivity will help drive its future growth.

“Though the manufacturing sector continues to outperform, growth is relatively broad-based, with domestic demand, exports, foreign investment and services, mainly travel and transportation, all contributing significantly, it says.

“The country also offers a number of strategic advantages including a relatively stable political environment, in addition to large-scale transport and utilities infrastructure development projects, which will boost Vietnam's regional and global connectivity. A large population size and rising incomes create attractive opportunities for consumer-oriented businesses.”

Clouds on the horizon

Vietnam’s economy is not without its problems, though and there are issues to consider if you are thinking about an investment in Vietnam. There is a need to upgrade the skill of the workforce to create productive jobs at a large scale in the future and the population is rapidly ageing, says the World Bank.

While health outcomes have improved with rising living standards, rapid growth and industrialisation have not been friendly to the environment and natural assets. Energy consumption has tripled over the past decade, and the country’s resources and infrastructure cannot keep up growing faster than output, it says.

“Unsustainable exploitation of natural assets such as sand, fisheries and timber could negatively affect potential for future and long-term growth. Compounding the problem is the reality that much of Vietnam’s population and economy is highly vulnerable to climate impacts,” the World Bank says.

In addition, urbanisation and strong economic and population growth are causing rapidly increasing waste management and pollution challenges. Ninety per cent of global marine plastic pollution is estimated to come from just 10 in-land rivers, and the Mekong river is one of them. Vietnam is among the 10 countries worldwide that are most affected by air pollution. Water pollution has significant costs on productivity of key sectors and human health, it says.

Looking ahead to the longer term, Vietnam will face risks related to ageing, climate change, and digitalisation, says the International Monetary Fund.

Fitch Solutions warns that Vietnam's competitiveness in terms of labour costs is diminishing as wage pressures mount in line with the rising cost of living. In addition, businesses will be forced to import foreign labour or invest in training at additional costs, owing to the shortage of advanced skills in the Vietnamese labour market.

These are all considerations for anyone who is thinking that they might invest in the Vietnam stock market.

Tackling environmental challenges

The Government is aware of the need to lower the environmental footprint of the country’s growth and adapt to climate change, and that addressing these challenges also presents opportunities to contribute to growth, the World Bank says.

“Key strategies and plans to stimulate green growth and sustainable use of its natural assets are in place," it says. The Government is also implementing measures to mitigate and adapt to climate change and address extreme weather events and natural disasters and assessing how to urgently address water and air pollution, marine plastics and need for solid waste management.

Trade wars – both good and bad

Vietnam's robust economic expansion has been powered by its transformation into a global manufacturing hub, says Moody’s Analytics in its report: Vietnam Outlook: Tiptoeing Toward the Winner's Circle. The fallout of the trade war between the US and China has proven advantageous for Vietnam as Chinese manufacturers shift production into the country to evade US tariffs. As a result Vietnam was one of the few countries in the region to experience a pickup in exports in 2019.

However, the relationship with the US is one that is fraught with its own tensions, and analysts are wary of the fall-out if Donald Trump decides to get tough. The trade balance between the US and Vietnam is heavily tilted in Vietnam’s favour, making the nation increasingly vulnerable to accusations of a one-sided relationship, Moody’s says.

US President Donald Trump has already taken notice of this dynamic, stating: “Vietnam is the single-worst abuser of everybody,” when questioned if he planned to impose tariffs on Vietnam. Vietnam was one of nine countries placed on a currency manipulation watch list by the Trump administration in May 2019, citing the rising trade and current account surplus with the US.

On a broader scale, falling global demand and a weaker economic outlook are the primary concerns for Vietnam’s export-reliant economy, its analysts say.

A market driven economy

Vietnam’s rapid reforms include plans to encourage more investment from foreign and private companies. Nguyen Xuan Phuc, the current Prime Minister, wants the private sector to account for 50 per cent of Vietnam’s GDP by 2020, up from 43 per cent currently, says Eastspring.

“Since taking office in 2016, he has sought to dispose government stakes in various industries – not an easy task as many state-owned companies are under the management of different ministries. However, progress is picking up. The government sold a majority stake in the biggest state-owned brewer, Sabeco, to a foreign firm in 2017. The government also set up a committee in February 2018 to oversee the sale of US$220 billion worth of state-owned assets.”

In line with this privatisation drive, more than 100 Initial Public Offerings (IPOs) are planned, potentially giving investors greater options when allocating capital to the Vietnam stock market.

How to invest in Vietnam

For private investors, it is probably impractical to try to research individual companies in order to invest in the Vietnam stock market. Instead, you can get exposure via funds – a more convenient route to investing in Vietnam stocks.

Between January 2016 and January 2018 shares which invest in the Vietnamese stock market more than doubled, driven upwards by the political and economic reforms that the government was pushing through.

For example, the price of a share in the VinaCapital Vietnam Opportunity Fund rose from £155 at the beginning of 2016 to a high of £364 in January 2018. Since then, the price has dropped back, and has been trading in a range of £320 to £350.

While this makes the Vietnamese market cheap in relative terms, much hangs on the fate of the US-China trade tariffs. When the row between the US and China broke out at the beginning of 2018, that was when the Vietnamese market also stalled. Whether or not the market will continue its stellar run depends on how President Trump chooses to treat China and Vietnam over trade tariffs.

An alternative emerging market?

On balance, Vietnam has made huge strides in its development. Vietnam was Asia’s top performing market in 2017, up 47 per cent. Vietnam is one of Asia’s best proxies to emerging market growth, says Ngo The Trieu of Eastspring.

“Sectors that can benefit from this strong growth include the energy, power, utilities, banking and consumer sectors. For long-term investors with higher risk appetite and access to the relevant expertise, Vietnam can potentially offer attractive returns that are less correlated to more developed markets.”

"As one of the fastest growing emerging markets, Vietnam remains an exciting opportunity and fits well into the emerging consumer theme, which is one of the main drivers behind our own position in Asian & EM equities," says Michael Born, senior investment analyst at EQ Investors.

He says that as a country sitting at the lower end of the development spectrum, Vietnam is firmly in the “growth” stage of the economy and such trends are mirroring the growth in consumption which has been seen historically in economies which are further along in their development, such as China in the 2000s or Japan in the 1980s.

How can investors get exposure to this market ?

Given the volatile nature of Vietnamese equities, investors should be mindful of the concentration risk inherent to holding a Vietnam-only portfolio, Born says.

"Within these economies, forces such as industrialisation and modernisation drive significant growth in demand for goods and services which are commonplace in developed markets, such as education, automobiles and luxury goods, whilst such purchases are less likely to gain traction in poorer countries, where money needs to be saved for essential purposes."

"At EQ, we do not hold any single-country strategies in the Emerging Markets, preferring to gain exposure to Vietnam through broader Emerging and Frontier Market mandates," he says. "Although there are ETF products which target Vietnamese stocks, the rapid changing landscape of the country and volatile nature means that active investing is recommended over passives. With liquidity less prevalent in Emerging Markets, we would favour some of the closed-ended investment trusts for Vietnam-only opportunities."

FURTHER READING: What will the outcome of the 2020 US election mean for markets?

FURTHER READING: Standard Chartered dumps coal projects in Asia

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