Advertisement

Invest in Vietnam – Asia’s other communist dynamo

Vietnam has reinvented itself. And now, this overlooked market is ripe for investment. Alex Rankine picks the best way to buy in.

954-CS-634

The Trump-Xi rapprochement may have grabbed the headlines but last weekend also brought good trade news for Asia's other Communist dynamo. The European Union signed a trade deal with Hanoi on Sunday that looks set to eliminate 99% of tariffs on goods and services between the two sides. That means that Vietnam's exporters are enjoying new opportunities in both America, the world's largest economy, and the EU, the world's largest single market.

Advertisement - Article continues below

As for the dispute between the US and China, Vietnam "has emerged as the biggest winner", say Gareth Leather and Alex Holmes for Capital Economics. Exports to the US have jumped by 50% since last summer as Trump's tariffs on Beijing prompt American importers to look for other suppliers. Trans-Pacific trade tensions have boosted Vietnam's GDP by around 0.5% over the last year. Economic growth for 2019 as a whole is now likely to hit an impressive 7%.

Trump's next target?

The trade war has encouraged a growing number of businesses to relocate operations to China's southern neighbour, where factory wages are often 50% lower than in the Middle Kingdom, note Gwynn Guilford and Dan Kopf for Quartz. Apple-supplier Foxconn has made moves to shift production out of China to India and Vietnam in recent months. Shoe company Brooks Running announced in May that it is shutting operations in China to move to Vietnam. South Korean electronics giant Samsung also looks poised to close its last factory in China, says He Huifeng for The South China Morning Post, and increase production in Vietnam and India.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

But what Trump gives he can also take away, say Tom Miller and Chen Long for Gavekal Research. Unhappy with a growing trade imbalance with Vietnam, he lambasted it last week as "almost the single worst abuser" and refused to rule out turning his tariff guns on Hanoi.

Whatever the White House does next, however, the long-term outlook is bright. Pledges of foreign direct investment (FDI) nearly doubled to $10.8bn in the first quarter of this year. FDI climbed by 9.1% in 2018 to $19.1bn, according to official statistics, marking a sixth straight annual record as capital poured into one of the region's most dynamic economies.

A successful renovation

Until the 1980s, however, it was anything but. At that stage it was emerging from "decades of war" and was "as poor as Ethiopia", says The Economist. Yet in 1986 the country's Communist leaders initiated the "doi moi" literally meaning "renovation" that paired China-style internal market reforms with a flurry of trade deals. The results speak for themselves. Since 1990 the country has "notched up the world's second-fastest growth rate per person" after China. In common with other small emerging economies, Vietnam's leaders have prioritised an export-led path to growth. Relations with the US have improved tremendously since the Vietnam war and America is now the country's single biggest export market, with China in second place.

Plenty of room to grow

The economic renovation also brought an intense focus on education. International tests show that Vietnam's 15-year-olds now perform as well in maths and science as their peers in Germany. The country spends nearly 6% of GDP on education, says John Reed in the Financial Times. That's "high by global standards" and significantly more than neighbours or most other countries in a comparable income bracket. In conjunction with the expertise provided by FDI, that bodes well for productivity and long-term growth.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

The large, young population, meanwhile, should underpin the development of the consumer economy. Two-thirds of the population of 94 million is under the age of 35 and the median age is 31. The Vietnamese have a reputation for being hard-working and entrepreneurial.

Rainer Michael Preiss notes on Forbes that Thai GDP per capita used to be 16 times higher than Vietnam's, but today the gap has narrowed to 2.5 times. Yet that still leaves Vietnam, where GDP per head sits at around $2,500 compared to more than $9,750 in China, according to World Bank figures, with plenty of room for rapid catch-up growth with its neighbours.

The Boston Consulting Group projects that the "middle and affluent class" defined as those earning at least $714 per month will hit one third of the population next year, making it Southeast Asia's fastest-growing middle class of recent years. Rising demand for new goods and services from these consumers underpins a bullish growth outlook for local businesses. A stable macroeconomy is another plus point. Inflation is under control (the World Bank expects it to head below 4% later this year) and public debt has declined over the past few years.

An overlooked market

Vietnam is still classified as a frontier market, which constrains how much fund managers can invest. Craig Mellow in Barron's says that local restrictions on foreign ownership have led global investors to crowd into "a few marquee names". Promotion to the main MSCI Emerging Markets index, expected as soon as this September or next year, will be a significant catalyst for the local stock market. Vietnam is still not "on the radar of most investors but the indications are that it will be in the future". The good news is that MoneyWeek's favourite Vietnam play, VinaCapital's Vietnam Opportunity Fund (LSE: VOF), which invests in both listed and unlisted companies and debt, already looks appealing on a 15% discount to net asset value.

Advertisement
Advertisement

Recommended

If you think now is a good time to buy, look at these investment trusts
Investment trusts

If you think now is a good time to buy, look at these investment trusts

With the latest market slides, an awful lot of assets are beginning to look very cheap indeed. If you are thinking of buying, Merryn Somerset Webb has…
10 Mar 2020
How to build a properly diversified investment trust portfolio
Sponsored

How to build a properly diversified investment trust portfolio

Max King explains how to build a well diversified portfolio using one of our favourite tools – investment trusts.
25 Feb 2020
Why investment trusts are the best vehicle for your money
Sponsored

Why investment trusts are the best vehicle for your money

Max King explains the advantages of investment trusts – sometimes called closed-ended funds – over their open-ended counterparts (or Oeics).
11 Feb 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

Most Popular

BP has slashed its dividend – and markets love it
Income investing

BP has slashed its dividend – and markets love it

BP has bowed to the inevitable and cut its dividend in half – and its share price promptly rose. John Stepek explains what it means for shareholders …
4 Aug 2020
Listed companies are dying out, and that could have serious consequences
Stockmarkets

Listed companies are dying out, and that could have serious consequences

Private equity is taking over from public stockmarkets as the biggest provider of capital to companies. That’s bad for investors and bad for society a…
3 Aug 2020
Gold hits the big $2,000 level – are Aim miners about to play catch up?
Gold

Gold hits the big $2,000 level – are Aim miners about to play catch up?

With the price of gold shooting through $2,000 an ounce, the yellow metal looks unstoppable. Things are so bullish, even Aim-listed junior gold miners…
5 Aug 2020