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Vietnam – why and why now ?

Due to 35 years of war followed by 19 years economic isolation (the USA lifted the embargo in 1994, but only in 2001 normal economic and trade relations were established) Vietnam today is where South Korea was about 35 years ago and China 15 years ago.

That Vietnam has a large and young population and abundant cheap labor (labr cost about one third of that in China) is well known, but the same can be said of other countries (e.g. Bangladesh, India and Nigeria). That Vietnam attracts much more foreign direct investments (FDI) is due to the high commitment and better education. The rate of illiterates in Vietnam is about 5 % compared to some 28 % in India. The latest PISA-Report (PISA = Programme for International Student Assessment) shows that Vietnam not only has a small number of illiterate people but the education of 15 year old students is comparable to much richer countries like Switzerland and is even better than in the USA.

In its study of 2015 regarding the expected economic development until 2050, the leading audit and advisory company PWC came to very flattering projections for Vietnam. In the recently published update, these projections were drastically revised upwards. Thanks to an expected average economic growth of 5.1 % p.a. for the next 34 years, GDP will grow by 442 % (in the last 16 years, the GDP growth averaged even 7 % and for the next 10 years the growth should be around 6.5 % thanks to the huge pipeline of FDI). As a result, Vietnam will become the 20th largest world economy by 2050. In general, one has to be very careful with such long-term projections. However, the most important factor is the demographic structure and development and the latter is predictable pretty well for the next 30+ years if “force majeur” - events are excluded.

As mentioned earlier, Vietnam has one of the highest rate of foreign direct investments FDI in % of the GDP. 2016, USD 24.4 bn (+7.1 %) FDI were registered and licensed, among them a number of large projects which will take years to execute. Last year, USD 15.8 bn FDI (+9.0%) were disbursed, and thus the pipeline grew further and is exceeding USD 150 bn. This means on the one side the creation of (qualified) jobs and thus income and purchasing power what in turn triggers domestic investments, and so on and so forth - i.e. the well known accelerator and multiplicator effect begins to work. On the other side, the well above average economic growth would continue even if as of a sudden no new FDI would be registered anymore. Therefore, the economic development of Vietnam for the next 10 years is better predictable than in any other country.

As announced during the campaign, Donald Trump withdraw the USA from the Trans-Pacific Partnership TPP. If he does not realize that this is a strategic mistake, TPP is most likely dead and the Chinese will be laughing up their sleeves because that’s clearly in their favor. The Chinese try to fill the gap and it will give RCEP (Regional Comprehensive Economic Partnership) a boost. Of the TPP-countries, beside the USA, Canada, Mexico, Chile and Peru are not participating in RCEP. But the two most populous countries (China and India) as well as all ASEAN countries (among them Indonesia, Philippines, South Korea and Thailand which were not in TPP). Therefore, RCEP will represent about 46 % of the world population, 40 % of world trade and one third of the global GDP. Vietnam was one of the signatories of TPP but is also in RCEP and, furthermore, has signed 14 more free trade agreements (FTA) of which 12 are already in effect and those with the EU and the EFTA countries will come into effect next year.

The economic growth is supported by a fast growing middle class. According to Boston Consulting Group it will grow from 12 mn in 2012 to 33 mn in 2020, i.e. by 175 %. This in combination with the fifth highest consumer confidence worldwide (112 points) according to Nielsen forms a solid base for the domestic economy.

To keep the economy growing at such a pace, Vietnam has to improve its infrastructure. The road system is expanded very fast and in the two metropolises Hanoi and Saigon, metro lines are under construction. According to World Bank, Vietnam between 2012 and 2014 improved from 72nd to 44th position of 155 countries under review re their infrastructure. The railroad system - first of all the 1’726 long “reunification express” connecting Hanoi and Saigon - has to be replaced and harbors have to be expanded. The airport of Saigon, despite continuous expansion, is at its limit. The cost of improving and expanding the infrastructure is estimated altogether at USD 300 bn what Vietnam can never finance out of the regular budget. And the debt ceiling of 65 % of GDP according to the constitution is almost reached.

Therefore, an “asset swap“ is the logic solution, i.e. sale of state owned enterprises to finance the urgently needed improvement of the infrastructure. The government has recognized this years ago and started to partially or completely sell state owned companies (SOEs). During the Vietnam euphoria in 2005 to 2007 this worked pretty well. Since the Global Financial Crisis, the interest of foreign investors is very limited and thus the realized sales prices low. Portfolio investors invested over the last 10 years only USD 3.5 bn in Vietnam, i.e. about 3 % of the USD 115.7 bn during the same period.

To change this, Vietnam must become for foreign investor attractive or even a ”must“. This is only possible by the inclusion of Vietnam in the MSCI Emerging Market Index. For this reason, in the middle of 2015 a change of the law took place which allows Vietnamese companies to increase the FOL (Foreign Ownership Limit) up to 100 % with exclusion of sectors of “national interest” like banks, telecommunication, etc. Furthermore, the government is putting more and more pressure on SOEs to become “Joint Stock Companies” as soon as practicable. With that the most important conditions of MSCI for inclusion in the Emerging Market benchmark index are met. Furthermore, the Government formed a task force from representatives of the relevant ministries, the State Bank of Vietnam, the State Security Commission (SEC) and both stock exchanges to work with Morgan Stanley on the inclusion of Vietnam in the MSCI Emerging Market Index.

Why is this so important for Vietnam? – Vietnam is reliant on huge interest of foreign investors to finance the development of its infrastructure. This can be achieved by the inclusion in the Emerging Market benchmark index. Most institutional investors (investment and pension funds, insurance companies etc.) follow a passive investment strategy, i.e. instead of stock picking they buy ETFs on different asset classes, countries and sectors. Is Vietnam included in the benchmark index, these investors have to invest in Vietnam as well what will cause a buying Tsunami and a revaluation. As previous cases show, this leads in the two years prior to inclusion typically to a surge of the stock prices by more than 100 %.

As the chart of the Vietnam Index is showing, the stock exchange is in an uptrend since 2016. It’s too early to say if the revaluation in view of MSCI has started already, at least it is not discussed on a broad scale so far. Last year, the foreigners for the first time in the last 10 years were net sellers of stocks (partly in connection with the conversion of bonds into shares). However, since the beginning of this year, the foreigners are clear net buyers (approx. USD 300 million). As Vietnam has among the Tiger-countries by far the most attractive valuation (see below table), there is still considerable upside. And due to the better prospects, even a premium would be justified.

 
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