Vietnam hits the sweet spot

Amid all the excited talk about India and China, Vietnam is often overlooked. Yet it stands out for its past success and future promise.

807-children-1200
Education spending will pay future dividend

Amid all the excited talk about India and China, Vietnam is often overlooked. Yet it stands out "for its past success and future promise", says The Economist. Since 1990, it has achieved growth per capita of 6% a year, second only to China. If it can manage 7% a year for the next decade, it will follow the same path as South Korea and Taiwan. That's illustrious company for a country that was as poor as Ethiopia in the 1980s.

One factor that bodes well is its openness to trade: it will be the biggest beneficiary of the 12-country Trans-Pacific Partnership if that deal comes off. Even if it doesn't, a recent free-trade agreement with South Korea and a planned one with the EU should help.

Vietnam also boasts a well-educated workforce. Public expenditure on education is an unusually high 6.3% of GDP, and 15-year-olds do as well as their German counterparts in maths and sciences. Investing in education allows Vietnam to make the most of trade and investment. It's not just a low-cost manufacturing rival for China, but an increasingly high-tech destination. No wonder, then, that Samsung announced a $300m research-and-development centre earlier this year, as Carl Delfeld points out on SeekingAlpha.com. Samsung makes 40% of its smartphones in Vietnam.

Vietnam's 98-million-strong population, moreover, is in a "demographic sweet spot", says Delfeld. The average age is 27 and 70% of the population is younger than 35. So there will be plenty of workers and consumers to drive growth in future. The shorter-term macroeconomic backdrop is also encouraging.

The economy is recovering from a state-driven credit binge. The currency has stabilised, inflation has fallen sharply, and interest-rates have more than halved. A drought has hampered growth of late, but GDP still expanded at an annual pace of 5.6% in the second quarter. Investors can access this promising long-term story with the Vietnam Opportunity Fund (LSE: VOF), which is on a 20% discount to net asset value.

Japan discovers the dividend

One estimate suggests that dividends per share could climb by 7.5% over the next year, while Japan Inc's vast mountains of cash should ensure that the payouts remain well covered. With the Japanese market out of favour, sell-offs earlier this year have ensured that the Topix index's dividend yield of 2.3% now exceeds the S&P 500's 2.2%. This is still below the average yield of 3.6% for markets outside America and Japan, but payouts are heading in the right direction.

Pakistan picks up the pace

And there could be further to go. The market has just been readmitted to emerging-market status by index provider MSCI after spending eight years in the frontier-market category. Funds with assets worth $1.5trn track the MSCI Emerging Markets index, which will be updated to include Pakistan next May. The local market can expect inflows worth 10% of overall foreign holdings over the next year, says one Karachi broker.

Global investors have also been impressed by the country's newfound macroeconomic stability. It has fulfilled the conditions of a loan package from the International Monetary Fund, which lowered the budget deficit by trimming subsidies. Along with privatisation of state firms and lower oil prices, this has helped propel growth to an annual pace of 4.7%, an eight-year high.

Recommended

I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020
Bullish investors return to emerging markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Why investors should beware of India’s surging stockmarket
Emerging markets

Why investors should beware of India’s surging stockmarket

The BSE Sensex benchmark index has soared by 90% since March, largely driven by foreign investors. But India's bull market is very vulnerable.
15 Jan 2021
How to invest in Africa as it takes its place in the post-pandemic sun
Emerging markets

How to invest in Africa as it takes its place in the post-pandemic sun

The African Continental Free Trade Agreement has come into force. Favourable demographics, improving governance and a growing technology sector also b…
14 Jan 2021

Most Popular

A simple way to profit from the next big trend change in the markets
Investment strategy

A simple way to profit from the next big trend change in the markets

Change is coming to the markets as the tech-stock bull market of the 2010s is replaced by a new cycle of rising commodity prices. John Stepek explains…
14 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
Here’s why markets have shrugged off the US political turmoil
Investment strategy

Here’s why markets have shrugged off the US political turmoil

Despite all the current political shenanigans in the US, markets couldn’t seem to care less. John Stepek explains why, and what it means for your mone…
7 Jan 2021
Free 6 issue trial then continue to