VietNam Holding (VNH) announced its annual report for the twelve-months to 30 June 2024. The company delivered an impressive NAV total return of  23.6% for the full-financial year, comfortably outperforming a 9.5% increase in the benchmark index. The fund also performed better than its peers by a notable margin.. The share price return was up 43% over the financial year leading to a significant tightening of the discount which narrowed to 2.6%, down from 15.6% the year prior. Citywire named the fund ‘the best emerging market single-country fund’ in November 2023 and awarded the investment manager’s team a coveted triple-A performance in May 2024.

Regarding performance, the manager noted that a continuous easing of monetary and fiscal policy has fueled growth, but two headwinds remain: the slow recovery of the property sector and a weakening local currency. The overall expansion in the economy has been buoyed by record levels of foreign direct investment (USD10.8bn disbursed in the first half of 2024) and strong growth in exports (+14.5% year-on-year for the first half of 2024). Imports have also increased, particularly from China. However, these are the result of manufacturing expansion, with more raw materials and semi-finished goods being imported, which helped lift the manufacturing PMI to a near-record high of 54.7. Overall, the first half of 2024 saw a USD11.6bn trade surplus, compared to a record full-year surplus of USD28bn in 2023. The high levels of trade surplus and record FDI have helped offset the weakening local currency, allowing the State Bank to sell around USD 6.4bn to provide more stability to the Vietnam Dong, which depreciated by 4.6% in the first half of 2024.

The manager noted that its high conviction approach and active portfolio selection has been a strong contributor to the recent performance. Its main investment approach remains focused on industrialisation (best-in-class manufacturers, international logistics, digitalisation); urbanisation (purposeful real estate, transportation, clean energy, and clean water); and domestic consumption and its enablers (sustainable retail, domestic logistics, products, and finance). These themes are increasingly interconnected, as industrialisation and urbanisation continue to drive robust GDP growth while digitalisation boosts domestic consumption, which is also supported by the ongoing modernisation of the country’s banking sector.

Regarding the outlook, it added:

“In addition to increased foreign exchange risk, which is already factored into the current net asset value of the portfolio, political risk has become a greater concern over the past twelve months. Evolving political risk is, of course, a global phenomenon, and Vietnam is no exception. Over the past year, there has been a significant push against corruption in Vietnam. A “blazing furnace,” established by General Secretary Nguyen Phu Trong, targeted errant businesspeople and government officials, resulting in several resignations. For much of the year, there were also speculations about Trong’s deteriorating health, and he died on 19 July 2024, just a day after receiving a gold medal for service to the nation. The Politburo requested that President To Lam assume some of Trong’s duties on an interim basis, and he was unanimously elected as General Secretary on 3 August 2024.

“We expect to see the government continue to pursue an open policy toward economic development. Vietnam has entered into 16 free trade agreements over the past two decades and has an ambition to be a key manufacturing hub. The country continues to attract record levels of FDI, which will further boost export growth. The government’s policies are pro-business and pro-capital markets.

“The prime minister and the Ministry of Finance want to see continued development of the stock and bond markets, with an ambition to increase the size of the stock market and bond market to an equivalent size of 100% and 50% of GDP respectively by 2025. The State Securities Commission is inviting feedback from market participants on a recently published final draft circular proposing to remove the pre-funding requirement on stock trading accounts. They hope to have this ready by September, ahead of the FTSE Russell review on Vietnam’s stock market status. Vietnam is on the FTSE Russell Secondary Emerging Market watchlist, and an upgrade would be very welcome. In the interim report this year, we included a more detailed article on the benefits of a market upgrade, but in simple terms, Vietnam would go from being part of a USD 90 billion frontier market universe to part of a USD 7-8 trillion emerging market universe. The World Bank estimates this could add a further USD 20-30 billion of net indirect capital flow within three years.

“Vietnam’s political structure can be perplexing for foreign investors, and its consensus-based approach to policy execution can sometimes result in measured (slow) decision-making. In previous annual reports, we discussed the problems in meeting budgeted levels of government infrastructure spending. This was under budget in 2022 and 2023, most likely due to certain officials’ reluctance to make difficult decisions. It is encouraging to see a five percent increase in public expenditure on new infrastructure year-to-date, with USD 10 billion spent in the first six months of 2024, and a USD 28 billion target for the full calendar year.

“Visitors traveling by air to Ho Chi Minh City will have undoubtedly experienced the queues upon arrival (and departure). This is the result of a spike in international arrivals, which have already returned to pre-COVID levels, combined with increased domestic travel, putting a strain on the airport, which is already overcapacity. The government has been putting pressure on authorities to speed up the construction of the new international airport at Long Thanh, roughly 50 km away from Ho Chi Minh City’s District 1. It now appears that the initial phase of the airport will be completed in 2026, six months ahead of schedule. Before that, the third terminal at the existing Tan Son Nhat International Airport is due to be completed in the first half of 2025.

“Recent developments in the power sector bode well for the rising adoption of renewable energy. Over the past decade, installed solar and wind capacity in Vietnam has gone from almost zero to 20 gigawatts. This was accomplished despite a relatively weak power purchase agreement (“PPA”) framework and a single monopoly buyer, the state-owned utility EVN. The new Decree 80, passed on 11 July, now allows for the direct purchase of rooftop-generated solar energy. This is essentially a soft deregulation of the energy market. This is positive for growth in solar power in a country that has high solar irradiance. The government is also planning longer-term initiatives to tap into the country’s significant wind power potential through offshore, nearshore, and onshore wind farms.

“As with the rest of the world, the rapid technological changes and digitalisation initiatives in Vietnam require vast amounts of processing power and storage. In another encouraging development, data centres can now be wholly owned by foreign investors under new legislation enacted in November 2023, which recently came into effect. The growth of domestic data centres is a key aspect of Vietnam’s growing digital transformation, and FPT should also benefit as a technology enabler.

“So, the outlook remains positive. Despite considerable domestic political changes, we do not see any change to the momentum related to policy. We also expect foreign exchange risks to reduce when the US Fed starts to lower interest rates, and the interest rate differential between the US and Vietnam (and other Asian countries) softens. The stock market growth over the past year has been domestically driven. Once the year of extraordinary global political turbulence is past, and markets are reassessed for relative attractiveness, we believe emerging markets, and Vietnam in particular (albeit officially a frontier market), will rally further.”

VNH : VietNam Holding delivers knockout year with 43% return