Venturing into Vietnam

Cherry Reynard asks if Vietnam could be a sweet spot for investors in 2024.

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From its ‘bamboo diplomacy’, to its infrastructure development, to its capable workforce, Vietnam has put itself in prime position to benefit from shifting supply chains across the globe. This is already being seen in rising foreign investment, which in turn is helping its consumer economy flourish. It is a rosy picture for the country’s economy, but can this translate into stock market returns?

Craig Martin, manager of VietNam Holding, points out that Vietnam recently welcomed Chinese president Xi Jinping for a state visit to Hanoi on the 15th anniversary of the establishment of a ‘comprehensive strategic partnership’ between the two countries. “This followed US president Joe Biden’s own visit a few months earlier when Vietnam upgraded its relationship with the US to the same partnership status,” Martin adds.

This flexible diplomacy has had a number of advantages for Vietnam. It has been able to attract significant foreign direct investment. Vietnam’s General Statistics Office reported that the country attracted around US$36.6 billion in foreign investment in 2023, a rise of 32.1% year on year. Foreign investors invested in 18 out of 21 economic sectors in the country, although manufacturing scooped the largest share.

It has put Vietnam in a prime position to benefit from the movement of manufacturing out of China. Ngo Thanh Thao, deputy portfolio manager of Vietnam Enterprise Investments, says large international companies have been moving to the country, including Apple, Sony and Adidas. This should create a virtuous circle for Vietnam, with the government spending around $30bn on new airports, roads and other projects.

She adds: “Vietnam is delivering one of the highest rates of GDP growth in the world, at 8% in 2022. Due to slow down in global markets, 2023 will be a little lower, but it should recover in 2024. The supply chain shift is a key driver.”

“Vietnam has put itself in prime position to benefit from shifting supply chains across the globe. This is already being seen in rising foreign investment, which in turn is helping its consumer economy flourish.”

Cherry Reynard

Cherry Reynard

As infrastructure develops and new jobs emerge, it also helps grow the middle class across Vietnam. As it stands, the middle class is around 30% of its 100 million population. Thao adds: “We expect the middle class to be around 50 million in the next 10 years. This is a key support for domestic consumption.” Urbanisation is also a factor, supporting sectors such as real estate, industrial parks and construction materials.

But will this economic growth translate into stock market growth? The Vietnam Ho Chi Minh Stock Index is up 2.8% over the last 12 months. Its recent history is rocky – with the market doubling during the pandemic, only to slide almost 40% from March to November 2022. The three investment trusts have produced divergent returns: Vietnam Enterprise Investments, VietNam Holding and VinaCapital Vietnam Opportunity have delivered -7.7%, 23.8% and 0.1% respectively over the past year. 

Ms Linh Vu, head of research at VinaCapital, believes there is more to go for: “Current valuations are cheap – on around 12x p/e forward. There is also a widening spread between earnings yield (11%) and the deposit rate (currently 5.5% after four rate cuts this year). It also looks attractive compared to other ASEAN markets.” She believes the market can sustain momentum even if interest rates don’t drop further from here, supported by low valuations and higher earnings. Discounts for the three investment trusts are still significant, sitting at over 17% for the Vietnam Enterprise Investments and VinaCapital Vietnam Opportunity. 

Nevertheless, there are caveats. Some fear that Vietnam may hit a capacity issue, with its infrastructure and workforce unable to keep pace with demand. As with all frontier markets, currency fluctuations remain an issue: this hurt returns from September to October last year. 

Inevitably, companies are relatively small and illiquid. VinaCapital points out that of the 1,700 companies in the market, only 18 are large cap (over $3bn) and only 64 companies are mid cap. This means that investors are getting good exposure to the domestic economy through the stock market, but it can be a volatile ride. 

For those who worry about a concentrated holding, Vietnam also makes up a small position in the Pacific Horizon Investment Trust, abrdn Asia Focus and BlackRock Frontiers Investment Trust. Vietnam’s economic trajectory looks compelling and current valuations provide an interesting entry point into a long-term story.