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 +10.8% but 1200 still offers resistance, but with good support in mid-1100’s

Following the sell-off in late January due to a COVID-19 episode in the north, the VN Index rebounded by 10.8% (TRS) in February to close at 1168.  The Government took its usual decisive measures to contain the virus and the market rallied.  Strong 4Q20 results provided a further boost as earnings growth finally turned positive at +15% yoy.  But 1200 remained a formidable resistance level, as shown by the futures premium falling from 40 points in mid-Jan to five points by late February when the peak was re-approached.  Going into March, the Index was clearly hanging back.  Abroad, inflation anxieties are mounting; at home, it is unclear when mass vaccination will start, and the overloaded trading system keeps freezing up.  We look for healthy consolidation in the mid-1100’s, where stocks are under-valued, but immediate upside catalysts may be lacking.

Foreigners remain net sellers, but outflow is declining and locals continue to absorb

One obvious drag on the market is that foreigners continue to be net sellers.  Their outflow has been declining since October but remains negative.  It looked as if buying might win out  this month, with foreigners having scooped up a net $63m by 19 February.  But redemptions from EM and FM funds resumed, and then Korean retailers started piling out again.  Some are taking profit, others are recovering money they invested near the 1204 top in early 2018, but in both cases, they are part of a global movement by Koreans to redeploy capital into their booming domestic market.  By month’s end, foreigners had net-sold $61m.  Compared to $67m in January, that at least kept up the declining trend.  And the foreign selling was smoothly absorbed by local retailers.  When the foreign exodus finally abates, one can imagine the impact on stock prices, if locals stay strong.

Concerns exist: global inflation scare, vaccine uncertainty, HOSE trading system

The plunge of markets overseas, as bond yields rise on inflation concerns, has not dented Vietnamese equities very much – though they will not remain uncorrelated if this trend continues.  Closer to home, the vaccination story awaits developments.  Of course, it is early days, but while contracts for 30-60m doses have been signed, and some down payments have been made, deliveries are proving more complicated (see overleaf).  And then there is the daily logjam on the HOSE trading system as it is swamped by accelerating volume.  A new system is being installed but probably won’t be in place before year-end, and in the meantime, market authorities are trying to find a fix that will help more than it hinders.  Simplistic proposals for a blanket increase in trading-lot size, which would have put off retail players, was rejected.  This was a positive sign.

But the value / growth play remains peerless

The most positive sign, though, is that as Vietnam’s economy moves towards reopening, the market retains its exceptionally strong earnings outlook, combined with its low forward valuation.

Economy ticking overly nicely in 2M21, Government projects +6.5% GDP growth

Macro numbers continued to paint a satisfactory picture of the economy in January-February.  Total trade was +24.5% yoy, with a $1.3bn surplus, reflecting rising international demand, and this was a meaningful result since 2020’s low base of trade only started in March-April.  Despite COVID-19 resurgence that caused lockdowns in some northern areas, retail sales were +5.5%.  The PMI rebounded to 51.6 from 51.3 in January, signaling an improvement in business conditions.  Inflation was essentially unchanged; observers warned it might jump in March, but mostly because of the low base commodity prices formed in March last year, led by oil.  The Government continues to forecast GDP growth of 6.5% in 2021, at the low end of a 6.5-7.5% consensus range.

Vaccines seem to be falling into place contractually, for mid-2022 immunization

The key factor in achieving growth targets will be effective mass vaccinations.  The view of epidemiologists seems to be that Vietnam could get fully inoculated by mid-2022, and in theory, the country has already made strong progress in this direction.  It has negotiated to receive 30m vaccine doses from Astra-Zeneca during 1H21, with a down payment of $30m to secure an immediate batch of 1.3m for front-line workers.  It has also arranged for the COVAX Facility to ship a further 30m doses in 2H21.  And it is talking to Pfizer, Moderna, Sinovac and Sputnik V about a further 150m doses.  Thus, 210m doses are planned, of which 60m appear to be contractually in hand.  With immunization programs proceeding faster than expected in the US and Europe, it might be reasonable to expect wide vaccination well before mid-2022.

But deliveries may not be quite as straightforward

But with the well-known manufacturing and distribution problems that suppliers are starting to have – and the priority that is being given to patients in US/Europe – deliveries are turning out to be less straightforward.  On Vietnam’s upfront 30m AZ doses that have been formally contracted and down-paid, company sources say that shipments may be strung out in 1-2m dose batches, at significant intervals.  For the emergency batch, 117,000 doses have arrived so far, and they will start to be administered in March – a good start, but not necessarily a rapid one.

So Vietnam is working on its own vaccines, with Phase 2 trials now starting

The Government is therefore pressing local bio-tech firms to come up with a Vietnamese vaccine.  One company, Nanogen, has had highly successful Phase 1 trials.  It is carrying out Phase 2 now and expects to move to Phase 3 in May.  If tests pan out, the Government will subsidize the product, Nanocovax, at $5/dose and authorize immediate injections in 2H21 to speed up herd immunity.  If this effort succeeds, the pandemic will provide another example of how Vietnam’s challenges are largely external, but the country is capable of rising to them.