(Dec 13): Vietnam is said to be the biggest beneficiary of the US-China trade war, which boosted its economy by almost 8% y-o-y in the first quarter of 2019, according to some estimates. But the country had already experienced an economic boom in recent years and is offering attractive propositions to investors.
Some compare Vietnam’s growth to China’s in the 1980s and 1990s. The former is expected to be one of the fastest-expanding economies in the next decade, with an average annual GDP growth rate of 7%, according to a Standard Chartered report in May. This will put it in the 7% club alongside countries such as India and Bangladesh.
“The Vietnam equity market is underpinned by robust economic growth. The economy expanded at an average growth rate of 6.1% per annum over the 10 years to 2018, with growth projected to exceed 6% per annum this year and next,” says Lum Ming Jang, chief investment officer at Public Mutual Bhd, which recently launched the Public Vietnam-Global Equity Fund (PVGEF).
A few factors are driving his confidence in Vietnam, he adds. This includes a healthy current account balance, relatively stable inflation and a young population. Up to 72% of the country’s population is between the age of 15 and 49, according to 2018 government data.
“Last year, Vietnam attracted foreign direct investment (FDI) inflows of US$15.5 billion ($21.1 billion), the third highest in Asean due to its business-friendly environment, attractive investment incentives and competitive labour costs,” says Lum.
Investors are paying attention. Vietnam’s main stock index — the Vietnam Ho Chi Minh Stock Index (VN-Index) — was among the top three performers in the region this year. “The VN-Index had gained 12.5% year to date [as at November]. Notably, the index managed to stay above the psychological level of 1,000 points for most of the trading days in November, with a greater probability of moving higher towards the end of the year as well as into 2020,” says Lien Le Hong, head of institutional research at Maybank Kim Eng Vietnam.
Lum observes that Vietnam’s equity market has seen its market capitalisation expand 26% per annum (as at October) over the past five years to US$194 billion. The VN30 Index registered an annualised return of 11% (in Malaysian ringgit) for the five-year period. According to Bloomberg, the annualised return was 6.9% (in Malaysian ringgit) for the previous five-year period.
The positive growth numbers are expected to continue. “Given the positive developments of the macro picture, strengthened corporate earnings and positive momentum being built, we look forward to the VN-Index moving up higher. Returns for 2020 may be more positive than in 2019,” says Lien.
A potential driver of growth is a possible status reclassification. Vietnam is categorised as a frontier market by major global equity indices. But as the market’s size and liquidity has grown, the FTSE Russell and MSCI are considering reclassifying the country as an emerging market, which would attract more capital from global emerging market funds.
“Vietnam is one of the largest frontier markets in Asia and the sixth largest in Asean, with a market capitalisation of US$194 billion as at Oct 31. As Asean is the third largest trading bloc after the US and China, global investors will increasingly look for opportunities in Vietnam as its stock market continues to grow,” says Lum.
“Frontier markets generally suffer from a lack of investable stocks and investment research support as well as thin liquidity. Compared with other frontier markets in Asia such as Bangladesh, Sri Lanka and Kazakhstan, the Vietnam market has shown the most improvement in these aspects in recent years.”
On top of that, MSCI requires the country to liberalise its market as a criteria for an upgrade. This addresses a major pain point for foreign investors — the foreign ownership limit on companies. The cap varies depending on the industry, with sensitive sectors such as banking having a higher cap.
Since 2015, the limits imposed on many non-critical industries have been removed. Shareholders are allowed to decide on the cap for their company. Last month, the government passed the Revised Securities Law, extending the definition of securities to include depositary receipts and allowing regulations on non-voting depositary receipts to be set up, which increases the potential of the foreign ownership limit being raised.
But there have been challenges. Over the years, many companies have opted to not completely remove the cap as it could change their status to foreign companies and make them subject to stricter rules, according to reports. While the revised law takes effect in January 2021, there is no clear timeline for its implementation, says Lum.
“As a number of large index stocks in Vietnam have reached their foreign ownership limit and are not open to investment by foreign investors, our fund will complement its holdings in local stocks with exposure to the global markets to offset any volatility,” he says, adding that PGVEF will invest at least 30% of its net asset value in Vietnam markets.
The fund invests in the financial, consumer, real estate and industrial sectors, among others. Banks in Vietnam are poised to benefit from the greater demand for loans amid the country’s rising per capita income, Lum observes. The consumer sector is supported by the nation’s young and growing population.
“Real estate companies are set to benefit from the country’s growing population and increasing per capita income while retail mall players are poised to benefit from higher consumer spending. For industrials, selected companies may be well positioned to benefit from the shift in Chinese and multinational companies’ manufacturing facilities to Vietnam,” he says, adding that PGVEF will invest in sectors that are expected to outpace the broader markets outside of the country.
Lien recommends buying stocks of companies that uphold higher-than-average corporate governance standards and have diversified shareholder structures, where management’s interests are aligned with those of other shareholders. There are many companies that fulfil these criteria and still have reasonable or cheap valuations, she says. “For example, the top large blue chips in Vietnam are trading at a 10% discount to their five-year mean and a 20% discount to their regional peers while still holding superior market leadership.”
These companies include dairy industry leader Vinamilk, Airports Corp of Vietnam (ACV), which owns and operates most of the major airports in the country, and Petrolimex, which owns many petrol stations in premium locations. “Foreign investors can still find at least 15 mid caps that are trading at a 40% to 50% discount to their regional peers, yet being leaders in their respective industries or sub-industries,” says Lien.
The best and most common way for investors to access Vietnamese markets is to open an account with brokers to buy blocks of stocks directly, she observes. It is more challenging for foreign investors but, if chosen correctly, the investments will be worth it.
VinaCapital’s Vietnam Opportunity Fund, which invests in listed companies as well as private equity, has most of its asset allocation in real estate and construction (19.2%), F&B (16.6%) and construction materials (15.5%). Its top holdings as at October are Hoa Phat Group, Khang Dien House and ACV.
In the near term, any slowdown in global and regional trade as a result of the US-China trade tensions could negatively impact Vietnam’s growth outlook as its economy heavily relies on exports. However, in the long term, consumption expenditure is expected to chip away at that dependence, Lum observes.
