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Why Vietnam’s emergence in the EM scene appears unstoppable

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By Rhea Nath
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6 minute read

EM managers are voicing a growing investment appetite for Vietnam, particularly as companies seek diversification in their manufacturing and supply chains using a “China Plus One” approach.

Vietnam’s economy is forecast to witness average GDP growth above 6.5 per cent per annum between 2023 and 2027 by the International Monetary Fund, driven in the near term by tourism and increasing investment.

The World Bank has also termed Vietnam as a “development success story” and forecasts real GDP growth to strengthen in the next three years.

“Economic reforms since the launch of Doi Moi in 1986, coupled with beneficial global trends, have helped propel Vietnam from being one of the world’s poorest nations to a middle-income economy in one generation,” it observed.

“GDP per capita increased sixfold in less than 40 years, from less than $600 per person in 1986 to almost US$3,700.”

For many emerging market (EM) managers, these demographic tailwinds of increasing urbanisation and a growing middle class, alongside targeted economic reform and a fairly stable political environment, are adding to Vietnam’s appeal.

Last year, Export Finance Australia, the Australian government’s export credit agency, observed that the country’s business environment has steadily improved alongside global economic integration and trade liberalisation through participation in multiple international trade deals.

“A track record of stability in the political and security environment is also conducive for doing business. Vietnam’s young population, alongside the increasing shift into higher-value added manufacturing and services industries, will bolster economic activity,” it observed.

Speaking at the Australian Wealth Management Summit in Sydney last week, Cassandra Crowe, vice-president of T. Rowe Price Group, identified Vietnam as an “exciting” opportunity among the emerging and frontier markets, with promising valuations.

“We would argue you need very thoughtful, global, fundamental research here. Vietnam, for example, our research team is quite excited for. It has a demographic dividend. It has a growing middle-income class and growing workforce, which is really encouraging and quite unique. It also has really promising valuations,” she said.

Will Main, head of Asian equities at Maple-Brown Abbott, sees promising opportunities in the consumer discretionary sector in Vietnam. Notably, companies like Vietnam’s largest retailer Mobile World Group and dairy producer VinaMilk stand out as strong prospects.

The Maple-Brown Abbott Asian Investment Trust holds a 1.4 per cent allocation to Vietnam and the Maple-Brown Abbott Global Emerging Markets Equity Fund holds a 3.7 per cent allocation.

“I would say that overall, there’s a consumer flavour to that, but it can be quite varied,” he told InvestorDaily.

“I was in Vietnam a couple of weeks ago and one of the ideas that we’re starting to look at now is some of the port names. Geographically, they’re in the right space, [being] close to a huge coastline.”

However, he admitted that market access remains difficult, with the need to pre-fund trades, even as liquidity remains tight.

“In regards to the size of the market – there are barely 25 companies with a market cap greater than US$1 billion,” Main said.

Still, the direction of change is “positive” for the economy, he said, adding the fund manager had a number of Vietnamese companies on its buy list.

“From an investment point of view, returns are driven by more than just GDP growth (thankfully) – it certainly acts as a tailwind for revenue growth – however we would argue starting valuations play a more meaningful part. The good news for Vietnam is that valuations today look attractive both in absolute terms as well as relative to region.”

He remarked: “I would have thought, if we’re having this conversation in one- or two-years’ time, that our allocation to Vietnam, all things being equal, will be higher than it is today.”

The emergence of a ‘China Plus One’ strategy

In its latest report celebrating its 30 years in emerging market equities, Robeco observed a growing trend of companies adopting the “China Plus One” strategy to diversify their manufacturing or sourcing beyond China by adding at least one additional country to their supply chain.

“This approach aims to mitigate risks associated with over-reliance on China, such as rising labour costs, geopolitical tensions, or disruptions in the supply chain,” it explained.

Additionally, it identified the trends of reshoring (bringing back manufacturing operations and jobs to the domestic country from overseas locations) and onshoring (sourcing inputs from a domestic location rather than from overseas) as factors enhancing supply chain resilience and supporting local economies.

“EM countries are essential to these shifting supply chain dynamics, particularly India, Mexico, Indonesia, and Vietnam,” Robeco observed.

In the case of Vietnam, lower labour costs, especially compared to China where labour costs have surged by double-digit percentages over the past decade, are a significant factor driving its attractiveness for businesses. This advantage enables companies to uphold competitive pricing while diversifying their manufacturing footprints.

Additionally, having invested in education and vocational training programs, Vietnam’s growing pool of skilled workers has been essential for industries such as electronics, textiles, and manufacturing, adding to its appeal.

Last month, Platinum Asset Management, which holds a 7.2 per cent allocation to Vietnam in its Platinum Asia Fund, observed the benefits from growing foreign direct investment (FDI) in the country, as multinational corporations (MNCs) are looking for new production bases in the region to offset the rising cost of doing business in China.

Among these has been South Korean electronics behemoth Samsung, which has been manufacturing in Vietnam since 2008, and is believed to have invested over US$20 billion in the country.

“While workforce productivity will take time to reach levels comparable to China, we heard anecdotes of employers’ high regard for the work ethics of local employees. The signing of multiple trade agreements in recent years, together with rising trade frictions between the US and China, should further propel Vietnam as a preferred location for manufacturing,” Platinum observed.

As optimism grows that Vietnam is slated for an upgrade from a frontier market to an emerging market over the coming two years, Platinum identified two broad issues that will need to be resolved – lifting the foreign ownership limit and establishing a central counterparty system to allow trading without deposit requirements.

Nevertheless, it held out that Vietnam remains an under-researched market on a remarkably similar growth path to China, albeit on a much smaller scale.

“Its attractiveness as a destination for foreign investment, particularly from companies seeking to reshore and diversify their manufacturing bases away from China, provides further support for the investment case.

“We are excited about the companies we have invested in that are tapping into these growth themes, and we will continue to explore further opportunities in this fast-growing, rapidly changing economy,” Platinum stated.