Asset Class: Emerging Markets Equities

Vietnam: The emerging China?

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It’s very hard to visit Vietnam and not get excited about the opportunity. Looking at the country today, there are many similarities with China 15 years ago. Indeed, the rate of development in Vietnam since it opened up to the world in 1990 is almost identical to the first 18 years of China’s growth post 1977. But the similarities go well beyond the growth rates.

State of the economy

Like China, Vietnam remains a fiercely state-led place. The Communist party’s compromise with capitalism should be seen in the light of self-preservation, as should its recent crackdown on corruption and the strict lack of tolerance of any form of dissent. Whilst private enterprise is now encouraged, state-owned enterprises (SOE’s) still dominate the economy and the authoritarian hand of government can be seen in almost all areas of business.

The Chinese model

The model for economic development is classically Chinese: maintain a cheap currency and encourage export-led growth based on cheap land and labor. A large, young workforce provides plenty of willing hands to work the factories. And things certainly seem to be going to plan. GDP growth is roaring along at 7%, well ahead of its fiscal deficit of 3%.

Many improvements still to be made

Of course, not all in the garden is rosy. Vietnam has huge need for more power stations, roads, bridges, railways airports and better internet connectivity, yet infrastructure investment has been slow. Another issue is the prevalence of SOE banks, and the problems within this sector. Non-performing loans are large, probably far larger than is recognized. The role of financial institutions, so critical to an economy, is not functioning in a traditional manner.

Lastly, whilst Vietnam is currently benefiting from not being China as far as the US is concerned, it does run a sizable trade surplus with America. There is some talk that when/if Trump is done with China and the EU, he will turn his gaze on Vietnam.

Privatization and trade

Perhaps the most significant reform of recent years has been the drive for privatization. We have seen this ourselves as the government has sold out of Vinamilk (dairy company) and Sabeco (beer producer), but there have been many others. In 2017 and 2018, there were 20 full privatizations, 31 companies divested by the government and 45 divested by the state investment fund. Whilst these measures have fallen way behind targets, their significance should not be underestimated. The momentum should continue through 2019, with many more deals slated for the market.

Open for business

A large part of Vietnam’s success has been a function of its aggressive free trade attitude. On many measures, Vietnam is the most open-to-trade large country in the world (according to the World Bank, trade equals 200% of GDP). This openness will only increase when the revived CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) comes in to force this year. Though losing the US is a blow to the project, the CPTPP still encompasses an area representing 13% of world GDP and should have a meaningful positive impact on all signatories. The US may no longer want to play, but Vietnam, Malaysia, Australia, New Zealand, Canada, Mexico, Chile, Peru, Indonesia, Singapore and Japan all do. There is even talk of a post-Brexit UK joining the deal!

Beyond being cheap and young, Vietnam’s labor force is also very well educated. Public spending on education has been high for many years (6% of GDP). As a result, Vietnam’s 15-year olds out-score their British and American counterparts in math and science in global rankings (OECD PISA 2015).

Where are the Chinese?

One of the most remarkable things about Vietnam is the lack of any visible Chinese presence. Given their shared ideological heritage, regional proximity, and the economic similarities noted above, one might reasonably expect Chinese commerce to be all over Vietnam. But it is not. There is no Alibaba (it is there but only through the back door via Lazarda), no Tencent, no Chinese banks, no Chinese consumer brands. Indeed, in terms of investment in Vietnam, China ranks behind Korea, Japan and Singapore, and by a huge margin. China accounts for only 5% of foreign direct investment in Vietnam, equivalent to that of Australia, Thailand and France combined.

This, of course, derives from the two countries’ fractious history, particularly the 1979 war. As such, the hostility to China in Vietnam has parallels with that shown in Taiwan.

Room for domestic business to bloom

For companies, this is very significant; the absence of Chinese players in the market has provided the opportunity for domestic companies to grow to the extent they have. Instead, Vietnam feels like an economy that is still learning.

All this potential has attracted some of the highest foreign investment (relative to GDP) across emerging markets, with many buying up whatever they can get their hands on (regardless of quality). How should we participate? History has taught us that the lion’s share of economic profit tends to accumulate to the best companies over the long-term and we don’t see any reason to disagree when it comes to Vietnam.

 

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