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 +10.1% to 882 as virus fears fade; ytd loss narrows to 7.4%

Following its slump in July due to the unexpected return of COVID-19, the VN Index rebounded in August, surging 10.1% ($TR).  Virus fears faded as Vietnam’s Government acted swiftly and decisively to contain the outbreak during a global equity rally that also improved sentiment.  The VNI closed the month at 882, narrowing its ytd loss to just 7.4%.

Foreign outflows accelerate as locals step up their buying

Daily traded value rose to $220m (+12% mom).  The market recovered despite foreign investors being net sellers for the second month in a row.  But the $133m of foreign outflows were absorbed smoothly by local institutions and retail investors returning to the market.

Diamond ETF bucks foreign outflow trend, attracting $9m in August

In contrast to the general trend of foreign outflows, the Diamond ETF attracted $9m in August, bringing its ytd inflow to $76m and making it the second-most bought ticker in 2020, only behind Vinhomes (VHM).  As a result, Diamond’s top holdings outperformed, led by retail giant Mobile World (MWG, +25.3%), Techcombank (TCB, +17.4%), and VP Bank (VPB, +15.6%).

Sentiment boosted by new vehicle for Taiwanese investors

Sentiment was further boosted by the launch of a new Vietnam fund by CTBC, one of Taiwan’s leading asset managers.  It is the first vehicle for Taiwanese retail investors to invest in Vietnam.  Dragon Capital will provide research to the fund and advise it on portfolio construction.

Positive developments for Vietnam’s equity market

The market was also supported by the latest MSCI review, which made no changes in its Frontier Markets (FM) category.  It had been feared that Argentina would be downgraded to a FM, which would have lowered Vietnam’s weighting and led to an outflow.  Our current analysis suggests that Kuwait will be upgraded to Emerging Market status in Nov, which would result in an inflow of roughly $200m into Vietnam’s market.  In addition, the Ministry of Finance released a draft circular that would allow T+0 trading, short selling, and margin lending on UPCoM, all of which are good stepping-stones for the future upgrade of Vietnam to Emerging Market status.

Vietnam’s market remains attractive at a 2020F PER of 11.6x

As the VNI approaches the psychologically significant 900-point level, volatility might increase considering that local investors were the main market driver and margin lending had picked up materially from the late-July low.  But at a current 2020F PER of 11.6x and declining uncertainty surrounding the second wave of the coronavirus, Vietnam’s equity market remains attractive as the economy continues to recover.

Sudden second wave surmounted

After a month of decisive action, Vietnam successfully contained the second outbreak of the virus, quashing local transmissions.  The resurgence of the virus served as a test of the Government’s ability to manage the health of people – and the economy.  The latter remained resilient:  businesses are beginning to rebound, and the trade surplus is drifting upward.  However, some economic indicators are lagging, such as FDI.

Trade surplus and market share in global chain bulk up

During the COVID-induced turmoil, Vietnam has been able to take market share from other countries in global value chains and trade.  After eight months of 2020, exports grew 1.6% yoy and imports declined 2.5%, all while global trade dropped by 22%.  As the result, Vietnam posted a record trade surplus of $12bn for 8M20 from just $5.5bn in the same period in 2019.  Local firms are at the forefront of export growth, establishing Vietnam’s position in global markets.  With the latest data up to July 2020, exports from local firms grew 13.8% yoy, led by steel and agricultural products, while FDI firms saw exports decline by 4.3%.  The EVFTA, which went into effect in Aug, will catalyze the entrance of Vietnam’s local firms into global markets.

Economy bolstered by favourable money supply

Due to the extraordinary current account surplus, the State Bank of Vietnam bought nearly 12bn US dollars ytd and injected an equal amount of VND into the market.  As a result, the money supply has increased by 8.5% ytd, allowing the bank to cut deposit rates by a further 20-50 bps across all terms, supporting the economy.  Vietnam’s foreign exchange reserves have hit a new record high of $92bn, and we expect they will reach $95-100bn by the end of this year.  However, the large foreign currency purchases by the State Bank could attract unwanted attention, especially from the US Treasury Department, which may designate Vietnam a “currency manipulator” in its next report.

FDI sees temporary setback

FDI disbursement was at a nearly four-year low in August, falling sharply to $0.72bn because of the restrictions on international travel.  However, under the positive backdrop of market share gain in trade and FX stability, FDI should pick up soon as the Government allows the resumption of international flights into Vietnam.

GDP expected to grow 2% this year

Vietnam is prepared for “the new normal,” whether that involves pushing back the pandemic or maintaining economic performance.  Looking outward to the world’s steady recovery and revived robust demand, we expect Vietnam will outshine the region with a 2% GDP growth this year.