The arrest of business leaders in Vietnam earlier this year raised some fears the country could repeat China’s crackdown on technology companies last year, but Andy Ho of VinaCapital Vietnam Opportunity Fund (VOF ) says this was part of maintaining standards on the stock market, not a move against innovation and entrepreneurialism.

In this video interview, Ho, chief investment officer of VinaCapital in Ho Chi Minh City, provides:

• an update on Vietnam’s fight against Covid-19;
• discusses the impact of the pandemic and war in Ukraine on tourism;
• explains the supply problems China’s lockdown has caused;
• but says that has been accompanied by a lack of inflation;
• the boom in domestic investor trading activity.

Can’t watch now? Read the transcript

Gavin Lumsden: Hello, I’m at the Frostrow Investment Company’s conference in London and with me is Andy Ho of VinaCapital Vietnam Opportunity Fund. Andy, lovely to see you. Now, Vietnam has established itself as the next manufacturing area after China. A lot of investor interest in it as a result. Could we just start talking about the country’s recovery from Covid because having initially done well in 2020, last year proved a lot more difficult with Omicron variant. So how has Vietnam done since then?

Andy Ho: Thanks, Gavin. Yes, Vietnam has become a large manufacturing powerhouse. I think it’s more on the back of a lot of multi-nationals diversifying their manufacturing away from China. China is still a core manufacturing base around the world. As it relates to Covid, yes, at the beginning I think the government of Vietnam did a wonderful job maintaining it and it’s really around trying to not allow Covid to penetrate in the population. That’s the restrictive lockdown we implemented and it was very successful at the very beginning. Needless to say, over time the Covid started to penetrate and we had to rapidly get the population vaccinated. The ability for a frontier market or an emerging market like Vietnam, to access the vaccine at the very beginning was significantly difficult. We had to rely on many organisations around the world like the WHO, etcetera.

So, it took time and time was not on our side because Covid started to penetrate the population. So roughly, Q3 [third quarter] of 2021 it was when Covid started to penetrate quite a bit into the population, yet we were vaccinating people as fast as we can. So that was a period of a lot of difficulties for Vietnam. Fortunately, we’ve gone past that. Yes, we’ve had many people that have died, but the amount of folks that died was not as high as expected and the hospital system was overwhelmed, but they’ve since recovered and today, I’m happy to say that Vietnam has come back to normal. The domestic economy is operating like pre-pandemic.

GL: People are out shopping, people going to work?

AH: Yes. Restaurants are full, you have to book and the irony of the thing is that during Covid, what I found out was that a lot of restaurants closed. So now, we’re living with Covid, the supply of seats has reduced. Yet, the demand has gone back to normal. So, guess what, the restaurants are packed, you have to book. Same thing with taxis.

GL: And prices are going up?

AH: Yes, and prices are going up, but fortunately for price, for that matter, inflation, we have been fortunate in the sense that about 35% to 40% of the inflation basket is made up of food and foodstuff and when the price of food and foodstuff typically goes up when China imports a lot of food and foodstuff from Vietnam. Now China is in their restrictive movement and their GDP is growing much, much slower than anticipated, so the demand for food and foodstuff out of Vietnam has come down. As a result, inflation is very tame. We’re at about 2% or 3%.

GL: So, you’re not seeing the knock-on effect on the wheat prices and foodstuffs from the Ukraine war?

AH: We are, but we are a rice-driven economy, more so than a wheat-driven economy. So fortunately, those inputs make up a very small component of our food and foodstuff. The biggest component of driving inflation, to be honest, is oil and gas, but again, oil and gas makes up a very small component of the inflation basket. Food still makes up the biggest and we are a producer and exporter of food around the world. So, we’ve been very fortunate for that.

GL: What are the prospects for the economy for this year? Is growth rebounding I imagine?

AH: Yes. During Covid over 2020 and 2021, we’ve been fortunate to grow about 2% to 3%. Most economies around the world contracted. We grew. Now, we’re at a pace to grow at about 6% to 7%, which is a normal pace that we typically see for a three-to-five-year timeframe.

GL: What about tourism? When you’re talking about the Vietnamese are getting back to normal life, but are you seeing overseas visitors coming to the country as well?

AH: We had hoped that roughly this summer, we would have a lot more international tourism come back to Vietnam. The routes are open. We’re not testing people for Covid to enter, but unfortunately, the situation is that China-, Chinese tourism makes up the bulk of our tourism, they’re not travelling. The second largest group are Russian. They’re not travelling and the third larger group is European and Americans and Australians, but really, I think they’re going to travel to Europe this summer because their currency is so inexpensive in Europe. So, a lot of the tourism that we see, that typically come to Vietnam, one, are not travelling at all or two, probably talking advantage of other places around the world that are less expensive. So, I think tourism will probably come back to pre-pandemic levels some time in second half of 2023.

GL: Okay so a way to go on that front. Just talk to me about the impact that China’s lockdowns are having because that’s slowing down the global economy, but what impact is it having on Vietnam? Where you’re benefiting from more companies, more manufacturers, maybe taking the operations out of China, moving them to Vietnam because it’s cheaper, but China generates a lot of economic activity. So that must be a negative, is it?

AH: Yes. So, on the positive side, like I said earlier, because China’s demand has slowed down, it’s helped tame the inflation in Vietnam, as well as other Southeast Asian countries.

GL: You’re not facing an inflation problem?

AH: No. The negative side is that a lot of the parts that Vietnam buys before producing goods to export to Europe or the United States, a lot of what we call ‘inventory parts’ do come from China. So, if they slow down in manufacturing these inventory parts for us to use in assembling the final goods to be exported, if those parts come to Vietnam slower, then our exports will be slower. So, at the moment, we’ve seen China locked down for what, four, five weeks now. We have enough inventory, but that inventory, as you can imagine, is depleting quite quickly.

GL: So, you’ve got a big supply chain issue coming from China?

AH: Yes. So, China needs to open up soon and produce those parts and ship it to Vietnam so we can assemble it and ship it off.

GL: Why has China taken this stance of lockdowns and trying to have zero spread of Covid, when it seems the rest of the world, Vietnam, UK, we’re coming to terms with it. We’re living with Covid.

AH: Sure, sure, sure. I’m not a China expert, to be honest. I think you should ask some of the investors in China about why they’re pursuing this strategy. I can only imagine that they simply don’t want to see their hospital systems, healthcare systems overwhelmed. They don’t want to see the death that countries incur because of Covid. They want to maintain a more stable situation and frankly, I’m not sure that’s sustainable, right. I understand that Shanghai will be open in the next few days or weeks, but I can’t imagine them staying open if more cases start to permeate within the population. They may shutdown again, right. So, it’s difficult. It’s difficult for all of us to look at how China is going to react because it has a huge implication on supply chain around the world.

GL: They’re concerned about the vaccine they’re using. What vaccine is China using?

AH: I think they used a locally produced vaccine. Sinovac, if you will. Again, I don’t know it’s effective rates. In Vietnam we use Pfizer. We use Moderna. We use various international vaccines and we seem to be very comfortable with the effects. Most people have had Covid, but the severity is very, very low and the hospitals are not overwhelmed. That’s why the government says, okay, let’s just go back to normal. If you have Covid, just like the flu, stay home and get well.

GL: Absolutely. Let’s turn to the stock market. Vietnam stock market’s been a good performer over the years. Volatile. It’s done badly this year, but the China concerns you’ve just been talking about must be a factor. There’s also been a crackdown by the government on graft and corruption and stock market manipulation. Been a number of arrests and that’s worried investors. Should investors be worried about a parallel with China itself? Obviously, last year, big stock market falls in that country because of regulatory crackdown on internet companies. Is there something similar going on in Vietnam? What’s the situation?

AH: No, I think Vietnam is not in a similar situation as China. The volatility or the ups and downs that we’ve been seeing over the last three to four weeks, if you will. One, you can actually say it’s correlated with international markets going up. The Dow Jones has gone up 500 points, 900 points and down. Up and down like a yoyo, right. So, Vietnam is not too far away from that. We’re being more and more integrated with the international community, but you’re right, there has been a few cases of domestic issues that have put investors on notice. Yes, there’ve been arrests from business leaders who’ve been accused of manipulating share prices and stock prices. To be honest, I think it’s a good thing.

The government has set in place a set of rules and regulations that they’ve adopted from the international community in terms of stocks and trading and other stuff. Over the last couple of years, the government has been focused on dealing with Covid and less focused on what these business leaders are doing. Now, coming out of Covid, the stock market’s done very, very well. You can call it inflated, prices up. As well as real estate and the government’s taken a closer look and said, what’s been happening over the last few years that’s pushed the share prices and the real estate prices up a lot?  Those that break the rules, will pay the price and that’s simply what’s happening.

GL: It’s about cleaning up the market. It’s not trying to deter foreign investors or western capital?

AH: Not at all. Not at all. I think it’s a good thing because it shows international investors like us, that the government is serious about these legal frameworks they’ve put in place and if you break it, you’re going to pay. So, to me, it’s not an anti-corruption campaign or anything like that. It’s just there are business leaders who like to push the limits or push the envelope in terms of how they want to do their business practice and if they breach the rules and regulations, they’re going to pay. We said this is going to increase the quality of the stock market in the long-run.

GL: Meanwhile, there’s a domestic investor boom going on by all accounts. Can you tell me about the numbers involved and why and how you’re exploiting it?

AH: I think the domestic investors participation in the market is similar to other countries around the world. My understanding is, a lot of countries, a lot of economies around the world have seen their domestic investors, retail-based investors, if you will, increase significantly in their countries. So, Vietnam’s gone through a situation where about 18 to 24 months ago, we were trading about $200 million a day. Today, at a peak about four, five weeks ago, we were trading at $1.4 billion to $1.5 billion a day. Today, we’re about $1.1 billion a day. So, there’s been a five to seven-fold increase over the last two years.

GL: Is that sustainable or is that a prelude to a crash?

AH: Okay. So that leads to the next few datapoints I’ll give you. The number of accounts opened has been at a record level and we have about five to 5.5 million accounts open today. So, the question is, where did the money come from, right? What we’ve seen is the money has always been in Vietnam. People are very wealthy. As FDI [foreign direct investment] comes and manufacturing, the economy has been growing at 5% to 7% for the last ten to 15 years. So, wealth has accumulated quite significantly in Vietnam and they’ve been in the banking system and they’ve been in the real estate system. So, people have said, as interest rates went down in the last two or three years because of Covid, a lot of people have taken money out of the banks and invest in the stock market.

People who have money and had planned on using that money to increase manufacturing capacity also took that money and put it in the stock market because they weren’t sure what’s going to happen in the next two, three years. So, they’re not going to invest in manufacturing scalability or expansion. So, they took some of that money and put it in the stock market.

GL: So better returns from the stock market?

AH: It gets to the second part, is that sustainable? Well, as inflation kicks in around the world, interest rates go up, right and the manufacturers or business owners see that we’re back to 6% to 7% growth, we’re exporting a lot, so I better take some of that money out of the stock market and invest in new capacity. So that’s what we’re seeing. We’re seeing a divergence of capital away from the market and away from real estate as well, back to manufacturing because now they see that they have to expand their manufacturing to meet the export demands.

GL: So, it’s a natural correction, a natural balancing. A rebalancing rather than something more drastic?

AH: It could be slower, but it’s been a bit faster than I had anticipated. I think it’s driven also by what you mentioned earlier, this crackdown of business leaders doing the wrong thing. So, a combination of crackdown, a combination of squeezing the margin lending-base has accelerated the decline of the stock market.