We explain how Vietnam has become one of the fastest-growing countries in the world and how investors can grab a slice of the action.
Vietnam’s emerging economy: what you need to know
Asia is home to some of the world’s fastest growing economies and, while China grabs most of the headlines, Vietnam is near the top of the leader board. The country was one of the poorest in the world at the start of 1980s as it continued to recover from a protracted period of conflict. But the country has become a leading emerging economy as it continues to build on economic and political reforms that started to be made in 1986.
In recent years, it has got a grip on public debt and introduced measures to bring its budget deficit down. More importantly, Vietnam has delivered tangible results in its fight against corruption and improve its governance, invested in infrastructure, and allowed the private sector to flourish by making it easier to do business. Together, this has installed confidence among overseas investors and made Vietnam one of the most popular destinations for companies looking to tap into cheap labour, alongside other countries like Thailand and Indonesia. Samsung and Nokia are just two global companies to have significant operations in Vietnam.
Vietnam has a youthful population, but one that is aging rapidly. It has grown by over 11% in the last decade and 70% of Vietnamese people are under the age of 35, with only 8% being over 65 (with an average life expectancy of 76). But, according to the World Bank, the old age dependency ratio that compares the number of people 60 and older to 15–59 year-olds is expected to double in the next 25 years.
Shifting the economy away from agriculture and toward more productive and lucrative industries, such as manufacturing and services, has been key to Vietnam’s economic growth. Agriculture remains the largest part of the Vietnamese economy and remains the biggest employer with nearly 40% of the population still working in the industry. However, its economic growth is being led by the service sector and industrial activity like manufacturing.
Real Gross Domestic Product (GDP) is estimated to have grown by about 6.8% in 2019 – over double the world average and the second-highest in Asia Pacific, only narrowly behind Cambodia. Vietnam is expected to grow faster than the wider region over the next three years, and comfortably outperform China. Still, growth is expected to slow further after hitting its peak in 2018.
The reforms have been so successful that the World Bank advises other countries in the region to follow its lead. ‘Replicating the success of China and Vietnam in shifting out of agriculture towards manufacturing and trade services could provide a significant boost to productivity growth in low-income economies,’ the World Bank said in January.
US-China trade war: how does it impact Vietnam?
The US-China trade war continues to be a dominate theme for financial markets as the world’s two largest economies overhaul their trading arrangements. The US is the biggest consumer market while China is the global hub of manufacturing, which has shifted the production of goods away from today’s developed nations.
But China no longer wants to produce cheap goods for the US and others and instead wants to follow them into the developed world by focusing on more sophisticated industries like technology, rather than churning out basic consumer goods. Today, Vietnam is becoming one of the main beneficiaries as the country attracts foreign companies looking to lower the cost of production as China evolves and the cost of doing business there goes up. For example, labour – the largest cost for most manufacturers – in China is on average more than twice as much than in Vietnam, according to Statista. About one-third of China’s population is regarded as middle class, compared to just 13% in Vietnam.
The US-China trade war has simply accelerated this shift out of China into other emerging economies that offer lower costs for businesses. Ironically, US President Donald Trump claimed one of the key goals of his trade war was to bring manufacturing back home, but it has had the opposite effect and simply shifted it to other parts of Asia, even if a few companies have returned production to the US.
Still, it does not mean the trade war is good for Vietnam. The US and China are the country’s two biggest export markets. Plus, it imports more goods from China than anywhere else because it is part of a global supply chain, where components are shipped between the two countries before a finished product is made and then exported back out.
‘Although Thailand and Vietnam have benefited somewhat from the diversion of US demand away from China, the trade diversion only partially offset the decline in their exports to Asia arising from the overall negative impact of global trade tensions and cooling global demand, including in China, on the region,’ the World Bank said in January.
Vietnam can’t influence the US-China trade war, so all it can do is try to capitalise as best it can and ensure it maintains momentum by making it the number one destination for those leaving China. One of the biggest threats to that could be the huge trading surplus it has with the US, which some fear will bring Vietnam into Trump’s crosshairs. There are also questions about whether Vietnam can sustain the influx of investment because of labour shortages and a lack of infrastructure. Some argue this is why the influx has been so extreme because companies are racing to secure the resources and contacts they need before they are exhausted and unavailable.
What are the best ways to invest in Vietnam?
Below is a list of closed-ended funds and Exchange Traded Funds (ETFs) that can provide investors with exposure to Vietnam.
Investing in Vietnam: Funds
VinaCapital Vietnam Opportunity Fund
The VinaCapital Vietnam Opportunity Fund is a closed-end investment company that aims to generate long-term returns by investing in Vietnamese companies or foreign firms that generate the majority of their revenues from the country.
The fund’s latest report covering December said the Vietnamese stock market had continued to be ‘uneven’, which has prompted it to shift more of its investments into private equity over the short to medium term – although over 60% of its portfolio is in listed equities. Real estate and construction make up over one-third of its portfolio, with its other largest sectors being food and beverage and financial services. Its three largest holdings are in steelmaker Hoa Phat Group, housebuilder Khang Dien House and Airports Corp of Vietnam, which owns and operates several airports.
The fund is a good way of gaining broad exposure to Vietnam, particularly if you’re looking for a mix of investments in publicly-listed firms and private equity. It has consistently traded at a discount to its net asset value (NAV), despite outperforming its benchmark over the past five years. It also pays dividends and conducts share buybacks.
Vietnam Enterprise Investments
Vietnam Enterprise Investments is another closed-ended vehicle and the longest running fund focused on Vietnam available on the London Stock Exchange, having been launched in 1995. It primarily invests in publicly-listed and ‘pre-IPO’ companies in Vietnam, meaning it does offer some exposure to private equity. However, it can invest up to 20% of its NAV in companies that operate in Cambodia and Laos. The fund looks to outperform the VN Index Total Return in US Dollar term on a rolling 3-year basis.
More than half of its investments are in real estate and banks. Its top three holdings are in telecoms retailer Mobile World, Vietnam’s largest commercial property developer Vinhomes, and bank ACB (also known as Asia Commercial Bank).
Vietnam Enterprise Investments does not pay a dividend and reinvests any payouts it receives from its investments, but it does conduct share buybacks.
Investing in Vietnam: ETFs
Xtrackers FTSE Vietnam Swap UCITS ETF
The Xtrackers FTSE Vietnam Swap UCITS ETF aims to track the performance of the FTSE Vietnam Index, which is designed to reflect the performance of the largest publicly-listed companies in Vietnam. The top components of the index include food and drink producer Viet Nam Dairy Products, Vinhomes and shopping mall operator Vincom.
Premia MSCI Vietnam ETF
The Premia MSCI Vietnam ETF aims to track the performance of the MSCI Vietnam Index, which also reflects the performance of some of the largest publicly-traded companies in Vietnam. The portfolio’s largest component, accounting for 22% of its weight, is conglomerate Vingroup, with a 16.5% weight to each Viet Nam Dairy and Vinhomes. This means almost half of the portfolio is exposed to real estate, with another 25% made up of consumer staples.
Market Vectors Vietnam ETF
The Market Vectors Vietnam ETF aims to track the performance of the MVIS Vietnam Index and reflects the performance of both publicly-traded firms in Vietnam and foreign firms that make at least 50% of their revenue from the country, such as Pharos Energy (formerely SOCO International), which produces large quantities of oil. Vingroup, Vinhomes and Viet Nam Dairy Products carry the largest weight in the portfolio.
Be aware of the risk and opportunities of investing in Vietnam
Vietnam is one of the fastest growing economies in the world and attracting record amounts of foreign direct investment from overseas. More companies are beginning to understand what the country has to offer thanks to the country’s successful economic reforms and, over the long-term, Vietnam looks set to be one of a handful of countries gradually attracting manufacturing work shifting out of China. The country has a young population and the size of the middle class is expected to roughly double by 2026.
However, investing in Vietnam comes with risks, especially for foreign investors that have little knowledge about the country. The IMF claims banking and capital regulations need further reforming, infrastructure is still lacking outside major hubs, and there are fears of labour shortages and greater influence of trade unions, which could push up costs for businesses and expose them to potential strike action. The trade war is having mixed results for Vietnam and therefore that remains a risk in 2020, as does the potential for Trump to target Vietnam’s huge trading surplus with the US. Plus, while its population is young, it is rapidly aging, which means addressing the country’s pension system is becoming a growing problem.
Vietnam offers above average growth potential, but the risks are higher than normal too. This is why opting for a fund or an ETF is sensible as they provide broad exposure and lower risk than investing in individual stocks.
By Joshua Warner @ IG