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 +2.4% in October on ever-increasing daily volume

The VNI staged its third straight monthly advance in October.  It hit a nine-month high of 961, back to pre-virus levels, before it cooled off on profit-taking, a third COVID wave in the EU and nervous markets ahead of the US presidential election.  The final close was +2.4% at 925 (TR$).  Daily trading jumped to its highest level since early 2018 at $357m (+24% mom).

MSCI-FM rebalancing and strong 3Q20 results were drivers

The highlight of the period was MSCI’s announcement that it would reclassify Kuwait as an emerging market in the FM100, taking 25.9% out of that index.  Vietnam was given half of this, moving its weight from 12.5% to 28.8%, to be phased in over the next year.  This makes Vietnam the biggest country in the MSCI-FM100, and the MSCI-FM will be recalibrated soon.  We expect up to $400m of new inflows on these reallocations.  A further boost for sentiment was strong 3Q20 results, with a continuing decline in negative earnings growth.

Foreigners remained net sellers at $313m in October and $515m ytd

Throughout the market’s recovery, foreigners have been inveterate net sellers, mostly in the form of jittery FM funds.  Locals have heroically offset.  In the plunge to the market low in March, and even on the rebound in April, FM funds gave an appearance of outright panic-selling, while locals loaded up at the bottom.  In October, foreigners dumped stock every day, for net outflows of $313m, the highest since March.  This brought the foreign exit ytd to $515m, or $1,436m if special placements are excluded.  Of course, locals can only absorb so much.  But one hopeful sign is that EM funds are now coming in as FM funds retreat, which could turn the tide.

But locals seem happy to buy in as foreigners sell out

And for now locals keep stepping up – both retail and institutional.  Foreigners’ biggest sales were in Masan ($127m), Vietinbank ($32m), and Vinamilk ($27m).  But Masan rose 54% on the back of subsidiaries’ headline deals.  And Vietinbank gained 8% because of decrees allowing State banks to increase chartered capital via stock dividends.  Vinamilk was lower, but only by   -0.9%.  A sure sign of local bullishness was investors opening 36,346 retail brokerage accounts in October, the third-highest ever.  Margin lending rates going from 12% to 8% surely helped.

3Q20 results suggest locals are not wrong

3Q earnings showed that locals’ confidence may not be misplaced.  Unadjusted for free float, 3Q20 was -10% vs -16% in 2Q20 and -25% in 1Q20.  This suggests that economic recovery is well on track.  Most earnings weakness has come from a handful of big transport and energy companies with thin floats.  When the free-float adjustment is made, and 2020-21 forecasts are assessed, Vietnam clearly offers the region’s best value for sustainable growth.

A new era of cheap money and robust infrastructure spending

Indicators in October confirmed our view that the economy is cruising into a good place.  Monetary and fiscal policy have been loosened this year to help fight COVID-19 but the ramifications go beyond the virus.  We believe Vietnam is entering a historic new era of cheap funds combined with robust infrastructure spending, yet without much prospect of  inflation or a lot of pressure on the external accounts.  Once the pandemic has finally been overcome, GDP is on track to quickly regain its accustomed pace of +7% pa – or maybe better – and entrench itself there.

PMI and exports on strong footing despite global weakness

One of the main macro results for October was the PMI remaining comfortably above 50, at 51.8.  This was slightly lower than September due to softer export demand in the EU and US, which are both ramping up COVID-19 restrictions.  Yet even with weak global consumption, October yoy exports were +9.9% and imports were +10.1%, bringing the 10M trade surplus to $18.7bn, double the number for 10M19.  Analysts are remarking that COVID-19 has been good for Vietnam’s exports, and we expect a positive resolution of the “currency manipulator” issue with the US.

Highly supportive rates thanks to controlled inflation

Meanwhile policy rates were again cut, now slashing the cost of money by 10-15% this year, with more likely to come.  Bond yields cluster at 1.5-3.0% and interbank rates are close to 0%.  Loan demand is picking up, with credit growth of +6.5% in 10M, from +3.8% in 1H.  But the CPI was just 3.7% yoy, and only at that level because of skyrocketing pork prices, which are now falling.

Five-year master plan for infrastructure is being rolled out

Cheap money makes it that much more feasible to launch long-overdue spending on infrastructure.  This has been stalled for three years because of anti-corruption probes following the leadership reshuffle of 2016.  Some $15bn in idle funds have piled up in the interim and foreign debt remains low at 35% of GDP.  The apparent playing-out of investigations, and the need for anti-COVID stimulus, is all the incentive that the Government needs to refocus.  It is now proposing to invest $118.5bn during 2021-25, or 3% of GDP pa.  The program would be concentrated on Vietnam’s big bottleneck of  transport and logistics – e.g., a new HCMC airport, North-South trunk roads, urban railways – and would also target telecommunications and energy,  especially LNG.  Funds for selected projects have already been disbursed in 2020, and action will get underway in earnest after the Five-Year Party Congress in January/February 2021.

Key regional player in 2021

Vietnam is building a powerful long-term growth model.  As progress on vaccines fuels hope for a re-start of the global economy, Vietnam will be a key country to watch in Asia during 2021