Vietnam

Vietnam continues to be one of Asia’s most compelling investment stories. With 94 million people – 41% of whom are aged under 25 – this young and dynamic country is the world’s 15th most populous.

Vietnam benefits from excellent demographics, an entrepreneurial culture, abundant resources, a largely coastal population living on its long seaboard, and a strategic location bordering China in the north.

Vietnam’s lower wages and operating costs are allowing it to capture manufacturing business from China. At the same time, newly signed trade agreements and internal reforms are making it ever easier for foreign companies to do business here.

Consistently growing by close to 7% annually, Vietnam is rapidly transforming into an export powerhouse with a thriving domestic consumer market to match. As a place to invest, the country continues to offer extraordinary potential.

VNI -4.0% in January as a technical correction was aggravated by a COVID-19 outbreak

The VNI fell 4.0% in January (TR$) to 1057, when a technical correction was aggravated by discovery in the north of the country of British-variant COVID-19 cases.  The technical correction was probably inevitable.  After five consecutive monthly gains, the benchmark had reached an intraday 1200 on 15 January, near the record close of 1204 in April 2018.  At the same time, margin-lending limits were hit for practically all brokers.  Profit-taking set in, and Korean investors chose that moment to accelerate the exit they had already been making in favor of the US and China and their own market.  Margin calls ensued, and by 19 January the Index had slumped to 1131.  A rebound started, but it was not to be.  The COVID-19 outbreak touched off immediate retail panic selling to an intra-day low of 998 on 28 January.  At times, there were no buyers for top blue chips.  But in due course the virus was seen to be once again contained.  The market closed well off its bottom and was showing good momentum into February.

Volumes nonetheless continued to surge, and foreigners did some net buying

None of these gyrations stopped trading activity.  Average daily turnover for the three exchanges jumped to a record $900m, with active retail investing bringing a few billion-dollar days, and the usual periodic crashes of the trading system.  Although foreign investors net-sold for the fourth straight month, dumping $75m, they turned into net buyers in the last three trading days, when stocks were at their low.  Evidently looking to invest on weakness, they scooped up $75m of shares – half of which were MWG, as foreign room opened on ESOP issuance.

Retail-driven market expansion is clearly not without risks

The market’s volatility directly reflected the entrance of mass retail investors in the past several months, amping up their bets with margin buying.  Leverage was $4bn by late Jan, or 1.6% of market cap, and perhaps 5% of the float.  Although the Index was -17% on the intraday peak-to-trough, many stocks fell 25-30% during that same interval.  But the market’s expansion will inevitably include active participation from retail investors.  The offsetting factor is that corporate and macro fundamentals remain attractive – as do valuations.

But corporate and macro fundamentals are attractive – and so are valuations

Among peers, Vietnam has the lowest PER and the highest EPS growth.  Our Top 60 companies so far have seen 4Q20 earnings growth of +6% yoy, after the previous three declining quarters in 2020.  Full-year 2020 looks to be +5% and even from this relatively high base compared to peers, we are projecting over +30% EPS for 2021.  If anything, the recent incidence of COVID-19 is likely to see a further loosening of monetary and fiscal policy as the Government strives to counter the effect of the virus on the all-important imminent Tet holiday.

Robust macro backdrop for Five-Year Party Congress setting 2021-25 policy

Headline macro numbers showed that the economy moved into 2021 in good shape.  GDP  growth of +2.9% last year was among the world’s highest, while January retail sales were +6.4% yoy and freight transportation +9.4%.  Inflation was -0.97% yoy and the VND is gradually ticking higher.  This was an encouraging backdrop for the Five-Year Party Congress that met in late January and has just wound up.  Only a few major decisions have been formally announced so far, but they are enough to indicate what policy may be like in the half-decade to come.

Party boldly declares private sector to be the main force for economic growth

The key development was the Party’s stunning official declaration that the private sector is the foundation for economic growth and no longer the State – which is being told instead to concentrate on restructuring of SOEs.   The Party has considered making this pivot before but has always shied away at the last minute.  No longer.  Putting the private sector at the forefront of policy is seen as the best way to sustain GDP expansion at 6.5-7.0% in 2021-25 and power Vietnam through the ranks of emerging nations.  Communiques call for Vietnam to be “a developing country with modern industry, surpassing the low-middle-income level by 2025”.

Leadership line-up prompts comment in international media

To implement these targets, the leadership has been reshuffled, with a combination of new faces and familiar ones.  Most importantly, the Party General Secretary, Mr Nguyen Phu Trong, was reappointed to what is effectively the top position in Government.  Given that Mr Trong exceeds both age limits (76 vs 65) and term limits (three vs two), this has led to comments in the international media that Vietnam’s old guard is clinging to power.  Although Mr Trong is known as a staunch anti-corruption crusader, who rooted out many wrong-doing elements in his 2016-20 term, a byproduct of this was a slowdown in infrastructure spending, a logjam on property-project approvals and a halt to SOE privatization.

But focus on private sector, supported by infrastructure revival, is policy dynamism

However, many dynamic policies went ahead at the same time despite these blockages,  resulting in Vietnam’s strong growth performance and its success in containing COVID-19.  Positioning the private sector as the country’s economic engine is not an example of hidebound Marxist-Leninist ideology.  Mr Trong is likely to be a transitional figure.  Infrastructure activity is already picking up in Vietnam, particularly on transport projects that had been languishing, and the Government has just announced a $120bn program to keep up the momentum.  Cash in hand, easy money and a sound fiscal position will make this program easy to finance.  Property project approvals have long since resumed and privatization is likely to regain steam in 2022.   Assuming the outside world cooperates, we are confident about Vietnam’s five-year prospects.