Vietnam as an alternative investment destination
Jack Yee (pictured) is portfolio manager at Diam Singapore.
After undergoing political and economic reforms (Đổi Mới) for the last 30 years, Vietnam has become one of the fastest growing economies in the Southeast Asia region.
In contrast to the economic growth of other Southeast Asia countries, Vietnam has weathered the recent global economic slowdown and on-going US monetary policy tightening cycle better, generating an average quarterly GDP growth in excess of 5% since the third quarter of 2013.
The long term economic prospects for Vietnam remain promising. According to the International Monetary Fund (IMF), the economy is projected to expand 6.3% in 2016 and 6.2% in 2017 respectively. Going forward, the country’s economic growth will be underpinned by demographics, rise in investment, exports and domestic consumption.
Vietnam is the 14th most populous nation in the world with an estimated population of over 91.5 million people. Approximately 60% of its population is under 35 years old. According to the IMF forecast, the population of Vietnam is projected to grow at an annual growth rate of 1%, reaching an estimated population of over 96.5 million people by 2020.
The youthful and highly literate population (in 2015, the literacy rate for the population aged 15 years and over was 94.5%) is one of Vietnam’s competitive advantages and accounts for an important part in sustaining its long term growth in becoming one of Asia’s key manufacturing hubs.
Strategically located in the centre of Southeast Asia, Vietnam is bordered by China to the North, Laos to the Northwest, and Cambodia to the Southwest. Unlike Indonesia or the Philippines, which are both archipelago nations on the outer boundaries of Southeast Asia, Vietnam’s proximity to China makes it easier to integrate into existing supply chains.
With regards to outsourcing, Vietnam also faces fewer natural disasters than other countries in the region. This makes the country an ideal destination for major multinationals to set up their manufacturing operations.
Global firms have been increasing their foreign direct investment in Vietnam after the country’s entry into the World Trade Organisation (WTO) and its free trade agreements (FTA) with the European Union, China, Japan, Korea, and ASEAN.
Furthermore, the Vietnamese government has given tax incentives to attract large foreign investors, especially those belonging in the electronic field. Notable companies who have invested in Vietnam are Intel, Nokia, Bosch, Samsung Group, LG Group and Panasonic. Although, the government has recognised that this would lead to losses in tax revenue for many years, the presence of these foreign investors is likely to help attract further higher value investment in added manufacturing projects, boosting job creation and wages growth for the locals.
Disbursed foreign direct investment averaged $9.8bn annually from 2005 to 2015 (10 year compound annual growth rate of 15.9%). In 2015, FDI reached a high of $14.5bn, a 12.5% increase as compared to 2014. In the next five years, Vietnam has a target to attract around a total of $65.5 – $72.8bn.
Over the last five years, Vietnam’s exports have risen on an annual average of 17.5%, driven by an exponential growth in electronic exports contribution after the country opened up its door to the Samsung Group. The electronic giant has invested billions of dollars in a cluster of factories that will produce a large percentage of the company’s smartphone handsets.
Electronic exports, which contributed slightly less than 10% of total exports in 2010, now accounts for approximately 28.8% of total exports. In 2015, electronic exports reached a high of $46.6bn (five year compound average growth rate of 45%) and are way ahead of the government target of $40bn by 2017.
This transition has reduced Vietnam’s reliance on traditional industries, such as Garments, Aqua & Agricultural and Crude Oil. Vietnam now ranks as the 12th largest electronics exporter in the world. In addition, Vietnam will be a key beneficiary of the Trans-Pacific Partnership (TPP). According to economists, the implementation of this treaty is projected to increase Vietnam exports by 38% within a decade and boost the country’s GDP by an estimated $36bn.
Under the 2016 – 2020 socio economic plans, growth will not only be predicated on export and investment, but also from the domestic market. The government aims to stimulate domestic consumption as an assertive effort to diversify growth and cushion any external volatility.
Already, retail sales and motor vehicles sales in 2015 are at record high of $144.2bn and $209,267 respectively. Domestic consumption, which accounts for slightly over 60% of Vietnam’s gross domestic product, will continue to be a major economic driver.
The prospect of better paying jobs in the cities means it is likely to see more and more Vietnamese migrating from rural to urban areas. Per capita income is projected to rise to $2,888 by 2020 (2014: $2,052) and the number of middle income Vietnamese to increase to 33 million by 2020 (2014: 12 million).
In terms of financial market reforms, the passing of Decree 60 last year marked a major milestone for Vietnam as the country opens its equity markets to full foreigner participation after 10 years of being restricted to 49% across the majority of sectors.
However, the full implementation has been slow as companies are responsible for their own limits. Management and boards remained cautious as they weighed the benefits of higher company valuations over uncertainties around government relationships, regulatory impacts and sector limitation.
The short term disappointment should not deter long term investors seeking to invest in Vietnam. As a frontier market, Vietnam offers potential diversification benefits since the equity market performance correlation with the other markets has been historically low.
In the long run, Vietnam roadmap to upgrade from “frontier” market classification to “emerging” market classification at MSCI should eventually see the country rerated to similar valuation as its ASEAN peers.