Xin Chao (Hello) to a Rising and Future Vietnam

Robert Michel |

Dr Bob Explains Series on Financial Topics

Xin Chao (Hello) to a Rising and Future Vietnam

From behind the airport check-in counter, a young man glances at me, then asks, “Sir, would you like a wheelchair?” That was unexpected. I’m proud that I can jog 16 miles, so I decline. ? Outside of the departure gate I board a shuttle to the plane. The shuttle bus doors shut just as I step in. It’s packed. A young man seated beside me stands and gestures for me to have his seat. Des Moines International Airport? No. Noi Bai International Airport in Hanoi, home to 7 million and the capital of and 2nd largest city in Vietnam.

Landing at my destination airport I take out my phone, open up the ride-hailing app, and tap out where I need to go. The app responds with the waiting time and cost. I agree to the terms and the ride. The app then displays my driver’s name, car model, and plate number, followed quickly by a warning to double check the plate number before hopping into the car. Uber or Lyft in NY? No, Grab in Hanoi.

Stand-still traffic and going nowhere fast. DC? LA? As with other metropolises in developing countries, traffic in Hanoi can be nightmarish. The sheer volume of vehicles, especially motorbikes, overwhelms the roads and sidewalks. On top of the volume, there are no traffic laws. Or, there are and nobody cares. One rule seems to apply: whoever gets there first has the right of way. It’s a jungle for drivers and pedestrians. I’m an experienced jay-walker from Manhattan and I find crossing Hanoi streets intimidating. One of our drivers pointed out that there are about 30 deaths a week in the country from traffic accidents. Implying that he thinks 30 is an acceptable rate, he emphasizes, that’s for the entire country of Vietnam, not just Hanoi.

Made in Vietnam

Vietnam’s economy has stepped into the minds of more Americans recently. On clothing sold in stores we see more often a label that reads, “Made in Vietnam.” Less visible is the volume of phone components made in Vietnam. Samsung, the Korean-based and world’s largest phone manufacturer, is Vietnam’s biggest exporter. Mostly, over the course of the past year’s trade dispute between the US and China, investors have speculated that Vietnam is a significant beneficiary.

Winning but …

With labor costs lower than those of China, businesses have been re-directing their investments to Vietnam from China even before the current US-China trade frictions. GDP has grown 6% a year between 2012 and 2017, much faster than the 3.5% for the world and 2% for the US.[1]

Vietnam has benefited from the trade scuffles between the US and China and will continue to. The Asian Development Bank recently confirmed Vietnam’s beneficiary standing in an escalating US-China trade conflict.

Under the “worse-case” scenario—which adds bilateral escalation, and a trade war in auto and auto parts between the US and its trading partners—Viet Nam, Malaysia, and Thailand would be the biggest winners, in that order, largely from redirected electronics, transport equipment, and machinery trade, while Bangladesh and Viet Nam would gain through garment and leather trade.[2]

But, echoing a 9/18/19 Financial Times story, re-organizing established global supply chains is complex and risks upending relationships built over years. Despite its youth and lower cost, Vietnam’s labor force remains small and shallow compared to China’s. And, as a CNBC report noted and I experienced, inadequate infrastructure could be a drag on sustained growth.

Communist and Capital-friendly

One thing sets Vietnam apart from most other fast-growing economies. It’s ruled by a single political party, the Vietnamese Communist Party, whose origins date back to the 1930’s. In 1986, with a more reform-minded leadership, the Vietnamese Communist Party sought to revive the country’s economy by introducing market reforms.

In people’s daily economic lives, it’s unclear that rule by a communist party makes much of a difference. With a standard of living about 1/2 that of its much larger neighbor China[3], the Socialist Republic of Vietnam seems eager for more foreign business investments. The aforementioned Financial Times story reported that Apple has conducted a trial production of its AirPods and Google is weighing production of its Pixel phone in Vietnam.

Sanguine Outlook

Independent of US-China trade relations, Vietnam is likely to continue to grow at an above-average rate.

Factors in its favor include:

  • Growing but still-small economy 1/30th the size of the US
  • Large population of 95 million, 13th largest in the world
  • Young demographics with 30% below 20 years old
  • High literacy rate[4]
  • Tech-friendly and entrepreneurial
  • Growing middle class

Potential speed bumps:

  • Lagging infrastructure development
  • Lagging legal and regulatory environment
  • Environmental degradation
  • Growing income and wealth inequality

Investing

What ways are there for US investors to benefit from the sanguine outlook for Vietnam?

Vietnam’s stock market is still tiny with a market value of less than $170 billion, which is about 1/3 of 1% of the world’s stock market total as of 6/30/2019.[5] Although it’s seeking “emerging” market status, Vietnam’s is still deemed a “frontier” market.

Frontier market funds are likely to include Vietnam. For example, the MSCI Frontier Markets Index consists of 28 countries. At the end of August, Vietnam accounted for 18% of the Index and its 2nd largest country (after Kuwait). “Emerging Asia” funds are also likely to include Vietnam. The investment vehicle with the most focused exposure to Vietnam remains the VanEck Vectors Vietnam ETF (a stock-like, exchange-traded fund with ticker symbol VNM).

If you like the idea of investing in Vietnamese stocks, stick with rules of prudent investing:

  • Maintain diversification (comments: Vietnam currently is less than 1% of the global stock market, and the aforementioned VNM exchange-trade fund itself consists of only 28 holdings as of 9/25/19)
  • Take a long-term perspective (comment: investors in Vietnam’s stock markets are overwhelmingly individuals, who so far have demonstrated a short-term approach to investing in stocks)

At a business conference, I introduce myself to a middle-aged man. I learn that he’s a cross-border mergers and acquisition banker. He’s also a venture capitalist focused on “fintech” (financial technology start-ups). San Francisco? Nope. Ho Chi Minh City, the largest city in and commercial hub of Vietnam. Welcome to a rising and future Vietnam.

Disclosure: This commentary is furnished for the use of Glen Eagle Advisors and its clients. It does not constitute the provision of investment advice to any person. It is not prepared with respect to the specific objectives, financial situation or particular needs of any specific person. Investors reading this commentary should consult with their Glen Eagle Advisors representative regarding the appropriateness of investing in any securities or adapting any investment strategies discussed or recommended in this commentary. The Chartered Financial Analyst (CFA) designation is conferred by the CFA Institute.

 

[1] The Economist Pocket World in Figures – 2020 Edition

[2] Asian Development Outlook 2019 Update, Asian Development Bank, p. 23

[3] Purchasing power parity GDP per person, The Economist Pocket World in Figures – 2020 Edition

[4] The Economist Pocket World in Figures – 2020 Edition

[5] Global Equity Markets Q2 2019, Dimensional