We argue that Vietnam is on a generational bull-run
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6 Key Reasons to Invest in Vietnam 2022: the Bull & Bear Case

[Published as guest on summerdays.com.vn in 06/2020, updated 05/2021]

Vietnam is one of the fastest growing economies in the world with many bullish tail-winds. Even so, very few investors in the West have an allocation to the large, innovative 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 generation-long bull-run, en par with the emerging markets bull-run of the 2000’s. The country is still considered a “frontier market”, and so it is relatively early as an investiable market. This is great news for risk-tolerant investors who believe in the country’s potential.

In this article, we cover several bullish tail-winds, including:

See Part II of our series on investing in Vietnam: How Retail Investors Can Get Exposure to Vietnam

How vietnam went from one of the poorest countries in the world to one of the fastest growing in the world: read more about the history of Vietnamese economic growth.

Sweet-Zone: Vietnam’s Socio-Economic Statistics

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

  • Good health and smart citizenry: Vietnam’s “Human Capital Index” (an index that includes factors such as 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 much more popular among global investors. 
  • Rapid growth: In 2019, prior to the global Covid-19 recession, Vietnam was the second-fastest growing country in Asia, at 7%/a, second to Cambodia; and 12th overall in the world. In 2020, while most countries’ GDP declined (-0.2% on average in Asia), Vietnam’s GDP nonetheless grew by a respectable 2.2% in 2020.
  • GDP upside: Vietnam still ranks 121st globally in terms of GDP per capita, at 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. 
  • Favourable Demographics: With a population of over 96 million, Vietnam has more people than Germany, France, or the UK. Vietnam also has a relatively young population. It’s demographics are bottom-heavy distribution: the median age is 30.5 years, which compares favourable to the global average (30.4 years), China (37.4 years), the EU (42.9 years) or Japan (47.3 years).

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

GDP/capita growth rates of Vietnam compared to other SE Asian countries, since 1970
Left: GDP growth on the natural scale, among Asian countries; Right: growth plotted on the logarithmic scale. The log-scale shows that Vietnam is actually the fasttest growing among its Asian neighbours, and its wealth-disparites are due to a 18-20 period of no-growth, prior to the Doi Moi free-market reforms of 1986. Data from http://data.un.org

Vietnam’s Status as an Emerging Market

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

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

RELATED: Learn more about the Vingroup – the “Samsung of Vietnam”.

With over $60 trillion dollars under management, even a tiny slice from such emerging-markex index funds will be a huge inflow into Vietnam’s equity market. In the meantime, Vietnam’s equity markets still have a long way 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-listing. There may be positive-feedbacks to Vietnam’s economy from the EM-designation, due to the large-cap companies getting cheaper access to capital: more international inflows of cash and higher valuations, will allow these companies to finance more economic expansion within the country.

Price history of the Vietnam 30 index up until 2021: a large break-out to the upside
Vietnam-30 index digesting gains after the 2017 monster bull run. Now, the index is breaking out.

Vietnamese are Hard-Working Industrious People

30 years ago, who would have expected “made in South Korea” to become synonymous with technological sophistication? Had you been familiar with Korea’s culture of hard work and conscientiousness, it was obvious in retrospect. Likewise, the Vietnamese culture of technical mastery and above-average work-ethic is a bullish macro-indicator.

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 hundreds of pop-up restaurants that line the streets during meal-times), or the multitudes of highly-specialized guild-towns which devote themselves to luxury craftmanship.

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

Village dedicated to embroidery-art, like paintings, outside Hanoi

Traditional woodworking and lacquer

Silver artisan making private-label high-end jewelry in Dinh Cong

slider-foxxcon-mobil

Foxxcon moves more production to Vietnam

Some of the guild-towns are disappearing, or much diminished; for example, the embroidery village of Quất Động just has a few serious artists left. 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.

Despite the sun-setting of some these traditional crafts, they nonetheless speak to Vietnam’s ability to specialize in high-end techniques. We expect this technical-savviness to transfer to newer technologies in the near future. Large global investment companies are likewise making this bet.

Vietnam: Free-Trade and Trade-War Benefits

Although the Trump-China trade war had soured trade during 2017-2020, this didn’t hinder 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 pact which includes Vietnam, Canada, Australia, 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 a confluence of macro-trends like Covid-19, have drawn the attention of many large global companies who are considering moving their manufacturing capacity away from China.

RELATED: Made in Vietnam – Top brands that have most of their manufacturing in Vietnam

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 restrictions.

Vietnam Ditches the “Zero Covid” Policy – Open for Business in 2022

At the end of 2021, Vietnam changed its Covid-19 policy from the misguided (and unattainable) “zero covid” policy like in China, to a more pragmatic policy of “safely adapting, flexibly, effectively controlling the COVID-19 epidemic[1][2].

In particular, the new policy means re-opening tourism with draconian quarantines, as well as prioritizing that factories remain open and maintain full employment — a 180 reversal from the summer of 2021. The boom in activity has seen many businesses operating at 130% capacity in order to meet back-logged demand.

For investors, there are two important points to consider:

  • First, the flexible policy demonstrates that Vietnam is more pragmatic and business-friendly than China and many Western countries, like Canada, who prioritize (so-called) safety, but do so little empirical evidence of any benefit to restrictions.
  • Secondly, the change in policy happened after pressure from the Korean Chamber of Commerce, the EU Chamber of Commerce, and the USA Chamber of Commerce. They wrote a letter to the Vietnamese government warning about the decline in the Vietnamese attractiveness to foreign investment should they fail to re-open as fast as neighbouring Asian countries [1][2]. Within a week, there was a flurry of Government activity to re-open, signalling that Vietnam is willing to listen to the international community and multiple stakeholders.

Being more pragmatic and willing-to-listen are attractive qualities to foreign investors. Vietnam is already seeing the dividends of this approach, especially as international businesses contine to suffer under the obstinate and unworkable policies of China, and look for alternatives.

Credit Markets in Vietnam (or lack thereof)

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 a falling interest rate environment. Both of the above apply to Vietnam.

Vietnam’s soverign credit rating is a paltry BB, which speaks to investors’ nervousness about the Vietnamese government’s ability to pay-back its debt.

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

  1. The interest rates of high-quality Vietnamese companies’ are artificially inflated compared 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 liberalize), 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 book capital appreciation.

See Part II of our series on investing in Vietnam: How Retail Investors Can Get Exposure to Vietnam

The Bear Case for Vietnam

When economic recessions hit a country, it is usually due to “unknown unknowns” that cannot be predicted. This is doubly true for frontier markets. In other words, it is more difficult to make the bear case for Vietnam, because it is difficult to predict when and how Vietnam will encounter a major financial recession.

Nonetheless, investors should consider these bear case catalysts:

  • Trade shifts back to China from Vietnam – this may be 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-capacity which inhibits growth. Productivity is still very human-intensive in Vietnam. Rapid adoption of new technologies, such as machine-learning and 5th-gen industries, may boost Vietnam’s productivity growth despite poor infrastructure.
  • 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. This causes inefficiencies, reduced business-dynamism, and leads to an overall 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 compared to developed and 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.

Let us know what you think: what industries or sectors excite you about Vietnam?

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