Vietnam defies Asia's economic gloom

published 5 October 2018

916_MW_P05_Markets — Vietnam: not just a cheap version of China

While several Asian economies have been struggling, Vietnam is charging ahead. The economy grew by an annual 6.9% in the third quarter of the year. For now, Vietnam "is defying the stress in emerging markets as regional rivals grapple with trade war risks and a stronger dollar", says Sri Jegarajah on CNBC. Vietnam's economy is dependent on exports too, but its "geographical proximity to China and its historically strong political and economic links with Beijing are paying dividends".

Under pressure from US tariffs, Chinese manufacturers have started shifting production to cheaper locations such as Vietnam. Manufacturing wages are 40% lower than they are in China. This is reinforcing a trend that has helped Vietnam develop its manufacturing sector over the years: foreign companies moving in to take advantage of cheap production.

Another Communist dynamo

The boom started when the Communist government introduced market reforms in 1986, transforming the country into one of Asia's fastest growers. At first, Vietnam was seen as a cheap version of China with well-educated workers, and thus primarily suitable as a manufacturing base. But as foreign investment has soared and expertise spread, industry has moved up the value chain.

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Vietnam benefits from a trade friendly administration, and "a desire to progress from being a frontier market to a more conventional investment destination", says Eoin Treacy on Fuller Money. Rules governing foreign ownership have been gradually liberalised.

The young, 90 million-strong population of which around 70% are between 15 and 64 will provide a large workforce and a source of consumption for years to come. Vietnam's middle class is expected to grow from 12 million in 2012 to 33 million by 2020. As a result of expanding consumption, retail sales grew by 10.9% to a record $130bn last year. Given this backdroop, it's no wonder Vietnam attracted a record $17.5bn of foreign direct invetsment in 2017.

Therefore it may not come as a surprise that valuations are high for the largest firms. Dairy firm Vinamilktrades on 23 times forward earnings, compared to 17 times for France's Danone, writes Clara Ferreira Marques on Breakingviews.

And if index provider MSCI upgrades Vietnam from a frontier to an emerging market, it could prompt inflows of up to $10 billion, given the larger pool of money benchmarked against the emerging market indexes. MoneyWeek's favourite Vietnam play, however, looks very reasonably priced. The Vietnam Opportunities Fund (LSE:VOF), is on a discount of 17% to net asset value.

Marina has a PhD in globalisation and the media from the London School of Economics, where she worked as a teaching assistant on the MSc Global Media. In 2014 she was invited to be a visiting scholar at Columbia University's sociology department in New York.

She has written for the Economists’ Intelligent Life magazine, the Financial Times, the Times Literary Supplement, and Standpoint magazine in the UK; the New York Observer in the US; and die Bild and Frankfurter Rundschau in Germany. She is trilingual and lives in London. She writes features and is the markets editor at MoneyWeek..