VIETNAM: THE CASE FOR A GENERATIONAL BULL-RUN

[This is post is part 1 of 2 posts to discuss: should foreigners invest in Vietnam (Part II will discusses how retail investors can get Vietnamese exposure).]

Very few foreign investors are invested in Vietnam, and almost no 401k/superannums/RRSPs have an allocation to the small SE Asia tiger-nation. As we will argue in this post, there are many compelling reasons why now is the time to get exposure to Vietnam.

Vietnam may be on the cusp of a generational-long bull-run, en par with the emerging markets bull run of the 2000’s. Vietnam is still considered a “frontier market”, and so it is still early-days in terms of its development and growth.

We cover several bullish tail-winds, including:

  • A culture of hard-work and technical mastery
  • Favourable socio-economic statistics (e.g., one of fastest growing economies)
  • Free-trade tail-winds and trade-war benefits
  • Upcoming emerging market status
  • Mis-priced corporate-credit due to weak sovereign ranking

1) Socio-Economic Sweet-Zone: Statistics

Despite being snubbed by most Western investors, Vietnam’s socio-economic statistics speak for themselves. They tell the tale of a fast-growing and productive people:

  • Good health and smart citizenry: Vietnam’s “Human Capital Index” (a mix of factors like a society’s overall health and educational attainment, etc.) is ranked 48 out of 157 nations, placing it between Bahrain and United Arab Emirates. Vietnam absolutely trounces Mexico (66), Brasil (88), and India (115), which are (oddly) much more common in investors’ portfolios (e.g., BRICS). https://www.worldbank.org/en/publication/human-capital
  • Rapid growth: Vietnam’s 2020 projected GDP growth is the highest in South East Asia at 4%. It was already among the fastest growing countries in the world for 2019, prior to the Covid-19 recession. Vietnam was the second-fastest growing country in Asian in 2019, at 7%/a, second to Cambodia; and 12th overall in the entire world.
vietnam growth
Vietnam: Fastest growing economy in SE Asia for 2020
  • GDP upside: Vietnam still ranks 121st globally in terms of GDP per capita, 8,677 PPP. Consider how this compares to economies like Singapore (105,689 PPP) or South Korea (46,452 PPP). This leaves plenty of upside growth for Vietnam. In other words,
  • Favourable Demographics: with a population of over 96 million, Vietnam is more populous than Germany, France or the UK. Vietnam also has a relatively younger population, with a bottom-heavy distribution (the median age is 30.5 years, which compares favourable to other places, such as the global average (30.4 years), China (37.4 years), the EU (42.9 years) and Japan (47.3 years).

While other aging economies are face terrible demographic head-winds, Vietnam’s savvy youth will push its economy through a generational-long bull-cycle of productivity and consumption.

2) Emerging Market Aspirations

Vietnam is classified as a “Frontier Market”. It was been trying to upgrade to an Emerging Market for several year now. If/when this happens, there will be a massive inflow of cash from investors all over the globe.

Consider that some of the largest investment funds (like EEM), will have to automatically (and passively) allocate some of their capital to Vietnam’s large-cap stocks, such as Vingroup (VIC), PetroVietnam Technical Services Corporation (PVS), Vinamilk (VNM), etc.

With over $60 trillion dollars under management, even a tiny slice from such emerging-markex passive-index funds will be huge a inflow to Vietnam’s stock market. In the meantime, Vietnam’s equity markets still have a long ways to go to meet the MSCI EM-designation requirements.

Many speculators have been trying to front-run this potential EM-listing. Such speculation could mean that Vietnamese stocks have already “priced-in” the EM-designation (i.e., Vietnamese stocks are already over-valued like an EM-market). Consider the massive 2017 bull-run for the VNX-index. As they say, “buy the rumour, sell the news“.

Speculative-valuations aside, there could be other good reasons to buy Vietnamese equity indices ahead of the EM-list. There may be positive-feedbacks to Vietnam’s economy from the EM-designation, due tot the large-cap companies getting cheaper access to captial: more international inflows of cash and higher valuations, will allow these companies to finance even more economic expansion within the country.

VN30_equities
Vietnam-30 index is digesting gains after the 2017 monster bull run. It now sits at the 200-week moving average

3) Free-Trade and Trade-War Benefits

Although the Trump-China trade war has soured global-trade for 2017-2020, this hasn’t hindered Vietnam’s success in finalizing two major free-trade agreements. For instance, the 11-country ‘Comprehensive and Progressive Trans-Pacific Partnership’ (CPTPP) is a landmark trade pack which includes Vietnam, Canada, Australia, and Japan, and others (some anticipate that the USA will eventually join as well). In 2020, Vietnam also signed a major free-trade agreement with the EU.

These trade deals, as well as the confluence of other macro-trends like Covid-19, have increased garnered a lot of new attention by large-cap foreign companies looking to move manufacturing capacity away from China.

For example, Samsung and Apple plan on moving more production to Vietnam. The trade appetite is so great, that the EU even chastised Vietnam for not opening its borders fast-enough due to Covid-19 restriction.

4) Hard-Working Industrious People

30 years ago, who would have expected “made in South Korea” to become synonymous with technological sophisitication? There are early signs that something similar may happen in Vietnam’s future: Vietnam’s culture of technical mastery and above-average work-ethic.

This point is obvious to foreigners who visit Vietnam and marvel at the ubiquitous signs of industriousness and entrepreneurship. Whether it is the new ports and industrial parks, or the sheer magnitude of street-level “hustle” (like the 100’s of pop-up restaurants that line the street during meal-times), or the multitudes of highly-specialized guild-towns which devote themselves to luxury craftmanship.

An interesting way to experience this cultural tail-wind is to visit the little artisan micro-centres around Hanoi. Vietnam has a long history of artisan-towns that are singularly devoted to one craft, such as the silk village of Vạn Phúc or the silver neighbourhood of Hàng Bạc, the musical instrument village of Đào Xá, or the wood carving village of Đồng Kỵ.

vietnam mobile manufacturing

Foxconn moving more production to Vietnam

Vietnam traditional woodworking

Traditional Wood-working

Embroidery painting

Silver artisan in Dinh Cong village.

Some of the guild-towns are disappearing, or much diminished; for example, the embroidery village is Quất Động. But if you succeed in locating one of the old masters who still produces there, you will witness an undeniable mastery of craft and luxury.

This speaks to a broader phenomenon that is Vietnam’s ability to specialize and master high-end techniques. We expect this technical-savviness to shift to newer technologies in the near future.

5) Credit

Bonds can make you money in two ways: i) high-yield from companies with poor credit-ratings; and ii) the ability to sell your older bonds at higher prices (i.e., capital gains), during an broad falling interest rate environment. Both of the above apply to Vietnam.

Vietnam’s credit rating is a paltry BB. This reflects the trust-worthiness of the Vietnamese government’s ability to pay-back its debt.

However, the country’s rating has an interesting effect on private Vietnamese corporations: domestic companies cannot have a better credit-rating than their home-country’s rating. This presents two interesting opportunities:

  1. The interest rates on high-quality Vietnamese companies’ bonds are artificially inflated relative to their global counterparts (e.g., ~6-10%/a yield for a 2 year bond).
  2. If/when Vietnam’s sovereign credit-rating improves (assuming that Vietnam’s economy continues to grow and become transparent), you can expect a massive re-rating of Vietnam’s high-quality companies. Increasing credit-quality will cause interest rates to decline, and existing bond-holders will have large capital gains.

The Bear Case

When economic recessions hit a country, it is usually due to “unknown unknowns” that can’t be predicted. This is doubly true for frontier markets. In other words, it is more difficult to make the bear case for Vietname, because it is difficult to predict when and how Vietnam will hit a major financial recession (as all economies must).

Nonetheless, investors should consider these bear case catalysts:

  • Trade shifts back to China from Vietnam (this is unlikely, because this would require China to sign a progressive trade deal like the CPTPP).
  • Competition from other SE Asia countries could undermine Vietnam’s allure. For example, Thailand is expected to join the CPTPP.
  • Poor infrastructure and small-productive capacity inhibits growth (productivity is still very human-intensive in Vietnam; although rapid adoption of new technologies, such as machine-learning and 5th-gen industries, may eventually extend Vietnam’s productivity growth ).
  • Foreign restrictions on investments. For example, foreigners cannot purchase land, and there are caps on the percent-equity that can be foreign-owned.
  • Fears of nationalization of industries and/or favourtism towards Vietnamese companies results in less foreign investment in Vietnam. This leads to inefficiencies, less business-dynamism, and a lower appetite for entrepreneurship by a cynical business community.
  • Foreign companies become disillusioned with Vietnam’s difficult-to-understand regulations and uneven law-enforcement (Vietnam has been moving towards a more transparent regulatory system, but the country has a long way to go to compared to modern liberalized countries)
  • International security tensions, especially with China (Vietnam has a long history of antagonism from China). A rising China may be bad news for Vietnam.

In some ways, all of the above issues are endemic to frontier-status countries. Vietnam, however, has a good chance of rising above them.

Part 2 of this blog discusses a few ways that non-Vietnamese investors can get exposure to Vietnam.

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