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.

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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.

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