How to invest in Vietnam – an emerging market that shone in a difficult year

Vietnam has been one of Asia’s most promising markets for a long time. Now it is shaking off the global coronavirus crisis and looking better than ever, says Cris Sholto Heaton.

The list of countries that managed to grow their economies last year is an unusually short one, which makes Vietnam stand out. Its GDP growth rate of 2.9% was low by historical standards – it typically manages 6%-7% – but still put it ahead of every other major economy in Asia and looks remarkable given the damage that the coronavirus pandemic inflicted on the world. Even at the peak of the crisis in the second quarter of the year, Vietnam just about eked out positive growth and has recovered quickly.  

Many MoneyWeek readers will be familiar with the reasons to be bullish about Vietnam’s prospects – we’ve written about it a lot over the years. A large population (97 million), helpful demographics (average age of 32), decent education levels, rising urbanisation and industrialisation, and a manufacturing sector that has increased its share of global exports by more than any other country over the past decade – together this suggests great potential for sustainable long-term growth. In key respects, Vietnam resembles South Korea or Taiwan – which made a spectacular success of economic development – much more closely than some of its Southeast Asian neighbours that have not yet managed to rise so far. 

Its performance over the past year has solidified that impression. Three things went especially well for Vietnam in 2020. The first will hopefully be irrelevant once the coronavirus pandemic passes, but is encouraging for the country’s governance. The second is extremely promising for the evolution of the economy – it’s the main reason to believe that Vietnam still has superior prospects to any other comparable emerging economy. And the third bodes well for the stockmarket’s long-term progress – although this remains a high-risk market and investors need to expect some ups and downs along the way.

Coping well with Covid-19

Vietnam’s immediate strength is that the impact of coronavirus has been fairly small and controlled compared to most of the world. So far, it’s had around 2,500 reported cases and 35 deaths. As in every country, there will be some unreported cases, but Vietnam’s statistics look pretty reliable – if there were large numbers of deaths that had not been recorded, it would be obvious.

This is not down to luck. All the specialist investors in Vietnam that I spoke to for this article – Dominic Scriven of Dragon Capital, Andy Ho and Khanh Vu of VinaCapital and Craig Martin of Dynam Capital – give a great deal of credit to how quickly the government acted once the first signs emerged that Sars-CoV-2 was going to be a threat. Vietnam is a country with a history of novel disease outbreaks – the first high-profile case of Sars was detected there in 2003 (although the virus had again arisen in China), followed by human cases of H5N1 avian flu virus (which prior to Sars-CoV-2 was considered one of the biggest risks for a global pandemic) – and was unusually well prepared. As the scale of the problem became clear, it introduced a quarantine system with different levels of isolation for those who had been infected and exposed, and largely closed its borders to travel. Even now, only people travelling for humanitarian reasons and those with critical technical expertise are allowed to fly into the country. 

Whether this response is the full explanation for Vietnam’s success is an open question. There are still many mysteries about this pandemic: it is hard to understand why almost every single Asian country has done comparatively well in keeping Covid-19 in check compared to Europe and the Americas, regardless of its demographics, the quality of its healthcare system and the specific measures it took (from extreme authoritarianism in China to a relatively open economy and society in Japan). 

Nonetheless, it is clear that the government took quick, decisive and consistent action, and that people in the country responded well to this. That’s not solely because Vietnam is an authoritarian system that can exert a lot of control (although it is) or because people didn’t want to risk catching the disease or being caught up in quarantine (although they obviously didn’t), but because Vietnam is a fairly cohesive society that puts a lot of emphasis on working together for the collective interests. This crisis has been a very good illustration of the strengths that it can bring to other goals such as economic development.

Growing exports and infrastructure

The ability to keep the pandemic in check and keep most of the economy open most of the time is a crucial part of why Vietnam did well in 2020 – but it’s not the whole story. Longer term, the more important factor is the way that the Vietnamese export sector is benefiting from companies moving some of their manufacturing and sourcing away from China to other destinations. This trend has been under way for many years, initially driven by lower labour costs in Vietnam and then by the trade war between China and the US during Donald Trump’s presidency, which made it increasingly prudent for multinational firms to diversify their suppliers.

Vietnam is not the only beneficiary – the size of the Chinese export-manufacturing sector compared to anywhere else in the world would have made it impossible for one country to absorb much of the shift. But it has done exceptionally well in moving up the manufacturing value chain, advancing from textiles in the mid-2000s to sophisticated electronics today, with factories now making flagship products for firms such as Apple and Samsung.

Relatively good education and skill levels in the workforce and government policies to attract foreign direct investment (FDI) are a key part of this – but that’s been true for a long time. In the past, infrastructure has been one of the biggest shortcomings – speaking to investors a decade ago, one of the biggest and most consistent complaints was Vietnam’s failure to deliver the level of investment and planning that made China so attractive for foreign manufacturers. Today, everybody agrees that the outlook is much more encouraging. The government plans to invest $120bn in projects such as roads, railways and airports over the next five years – as much as it spent in the whole of the past decade.

So if government policy and economic progress last year were good, what of the stockmarket?

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