Vietnam is gradually shaking off the burdens of its troubled history. Invest in its bright capitalist future, says Max King.
To older generations, Vietnam is indelibly associated with the war. To younger generations, it is a compelling travel destination, and to those who have been there, it is a motorcycle race track. The country has a population of 94 million, and 45 million registered motorcycles, which makes crossing the road hazardous, especially when an oncoming vehicle is carrying a family of four and several pigs.
However, Vietnam is still a divided country, with clear differences between the more populated and prosperous south and the more conservative north, where political control resides. In the north, pilgrims (admittedly, mostly schoolchildren) queue around the block to visit the ghastly Ho Chi Minh Mausoleum and the associated museum, built in the Soviet brutalist style. In the south, Ho Chi Minh hats, a fashion accessory in the north, attract about as much respect as a hoodie at Ascot.
In the north, they refer to the Vietnam war as “the American war” (but there is no lingering resentment); in the south, they are not sure that they weren’t on the losing side. In the north, communism had deep roots; in the south, it lasted fewer than 15 years, suffering from famine and hardship before it started to be dismantled in the Gorbachev era. Prosperity and the appointment of a southern prime minister may have diffused the political discontent, but corruption and cronyism have been problems. Nowhere do entrepreneurs get rich so quickly as in the reforming, or former communist, countries where the government owns all of the assets, but has no money and no business skills.
Legacies of the past
The differences reflect not just the division of the country between 1954 and 1975, but much more ancient rivalries – the country had been divided before. In the north, they don’t like the Chinese, Vietnam’s traditional enemy, particularly in the border regions that suffered badly from China’s invasion in 1978. This was in retaliation for Vietnam’s ousting of the murderous Pol Pot regime in neighbouring Cambodia. In the south, they don’t much like the north, and in the middle, where Vietnam’s royal family used to be based, they don’t appear to much like either. The French, who divided the country into Tonkin, Annam and Cochin, probably got it right.
Surprisingly, the French left more of a mark on Hanoi than Saigon (only tourists and northern communists call it Ho Chi Minh City, locals will tell you) – or maybe the north has preserved it better. While Britain’s legacy to its colonial outposts was botanical gardens, exclusive clubs and brown Windsor soup, France’s was opera houses, town halls and the baguette. The only legacies left by the Americans are the tasteless glass and concrete former presidential palace in Saigon, which replaced fine colonial-era buildings, and military bric-a-brac sold on street corners, much of it probably fake.
A booming economy…
Far more pervasive than the legacies of the past, though, is the evidence of the current economic boom. This is evident not just in the traffic, with cars now replacing the motorcycles that once replaced the bicycles, but in the new houses, offices, factories and hotels that are either completed or under construction. National GDP is now over $200bn, and it has grown by more than 6% a year since 2000. This has spawned a thriving stockmarket, on which listed companies hold a total value of more than $100bn.
Vietnam’s first stock exchange, based in Saigon, was only inaugurated in 2000. It didn’t take long for specialist funds to be established, with the London-listed Vietnam Opportunities Fund (LSE: VOF), managed by VinaCapital, being among the first. Investors rushed in, asset values boomed, the economy overheated and the inevitable bust followed, with inflation reaching 20% in 2008. However, the last nine years have seen falling inflation, renewed growth and a thriving capitalist culture. This makes Vietnam a compelling investment opportunity, yet one that is still widely ignored even by emerging-market investors. Manufacturing wages are 40% lower than they are in China, which gives Vietnam a key competitive advantage. Meanwhile, two-thirds of the population is under the age of 35. Its climate, beaches and cultural attractions are a magnet for tourists, it is well endowed with natural resources (most notably oil and gas), and output from agriculture and fishing has been growing steadily. Foreign investment has been strong and the middle class now accounts for a third of the population.
… and a frothy market
But, as China has persistently shown, booming economies don’t guarantee great investment returns. The performance of the MSCI Vietnam has also been erratic with the 12-month return of 44% (in US dollar terms) accounting for nearly all of the five-year return of 53%. However, VOF is not tied to its index, so its net asset value (NAV) has risen by 112% during that period, even although it was left well behind in this year’s frothy market. VOF does not restrict itself to listed equities, which account for less than two-thirds of its underlying portfolio. It also invests in equities that are traded over the counter, as well as in property and private equity. These accounted for half of the portfolio in mid-2016, but VOF has been selling its property projects when completed and one private-equity holding has recently listed. With local management and $1bn of assets, VOF can access the opportunities that international investors can’t.
The portfolio is concentrated: 60% is in the top ten investments and 25% in just two; dairy product group Vinamilk, Vietnam’s largest listed company; and Hoa Phat, a provider of construction materials. Although partially realised, the holding in Vinamilk dates back to 2003, and since then it has multiplied nearly six-fold. Also notable is the nearly 7% invested in the unlisted Airports Corporation of Vietnam, which manages 22 airports and is seeing double digit passenger growth.
Head to the frontier
As to the future, chief investment officer Andy Ho is optimistic. “Vietnam will remain a very exciting place to invest in 2018 with similar growth dynamics to those that propelled GDP growth in 2017. Valuations are rising, but remain well within the regional average, and we believe earnings growth will continue to justify further gains,” Ho says.
More importantly, there are plenty of new investment opportunities, with 25 potential deals in the pipeline, including more than $100m-worth at an advanced stage. Privatisations, 65 of which VOF has invested in since 2003, are expected to continue. Hence the portfolio’s 9% holding in cash reflects a promising outlook for new investment, rather than any caution on prospective investment.
Vietnam is excluded from the MSCI emerging-markets index, as it is still confined to the frontier markets category along with Nigeria and Argentina. To the Vietnamese, this is an affront. But to investors, it may be an opportunity, as inclusion is only a matter of time. When it happens, the passive funds and big investment institutions will have to start investing, which should limit the downside. VOF, trading on a discount to NAV of around 18%, provides the ideal way to profit from long-term growth.