By Naomi Waistell, Polar Capital Emerging Markets Stars fund manager
Vietnam is one of if not the fastest growing Asian economy, taking the baton from China a few years ago. It has a thriving, young, working age demographic with more than 70% of its population aged under 35 and who come at much lower cost than their equivalents in China or the US. Many years of consistently high GDP growth have been due to a highly attractive combination of political stability with sound pro-market execution from the socialist government which has managed to slash poverty from 17% to less than 5% in a decade.
Perhaps the best-known growth driver for Vietnam is its step-change in foreign direct investment (FDI), benefiting from an increase in exports due to what is widely known as China Plus One, where companies are avoiding only investing in China. As a result, Vietnam is benefiting from companies diversifying their supply chains away from the neighbouring giant to a country which is lower cost and lower risk.
Its share of exports, to the US in particular, had been increasing incrementally to 2015 when it saw a step change and even greater gains. The backdrop of US/China trade tensions from 2018 saw an even more pronounced rise as China lost share thanks to others imposing trade tariffs on the world’s second largest economy. The pandemic, with different restrictions across the globe, led to further shifts in supply chains and companies considering how to best structure their businesses.
Vietnam continued to sign more than a dozen key trade agreements during lockdown, including the regional comprehensive economic partnership (RCEP). These partnerships will make it easier for companies to do business in Vietnam, positioning itself ever more as a manufacturing expert with ease of access to broad, international markets and benefitting from 3,000 kilometres of coastline and the close connections to China.
The runway for growth is undeniably large and the targets ambitious but Vietnam is now moving more towards manufacturing higher value products, more in electronics rather than textiles. Electronics have increased to more than 40% of goods exported from less than 15% in 2010.
As testament to this, last August Apple announced they would start producing MacBooks and Apple Watches via their suppliers in Vietnam, in addition to some iPad production they moved there during the pandemic. This will involve the buildout of large plants and greater commitment to investment in the country.
One of Vietnam’s most critical FDI sources is Samsung Electronics. The South Korean technology giant employs tens of thousands of people in Vietnam across a number of sites and is the largest investor in the country, with 50% of its handsets being produced there.
There is frequent hope that Vietnam will be upgraded from its current, off-benchmark, frontier market status to emerging market status by MSCI. The Vietnam stock market overall now meets the size and liquidity requirements to be included, with a four-fold surge in retail participation during the past 2-3 years, driven by digital account technology. However, the limiting factor is the strict foreign ownership limits (FOLs) that constrict the market depth.
Companies could change these individually, but they do not want to open up too much and create the possibility that a Chinese or other large entity could launch a takeover, however low the possibility. The government aspires to emerging market status and could solve the problem via a similar method to that used in Thailand that requires setting up a state-owned enterprise. As yet there has been no movement on this.
The reversal of deglobalisation is one of the biggest themes of our times. Trade wars, tariffs, the global pandemic and even a war among two democracies in Europe means that a focus on the control and resilience of supply chains is front and centre for all companies.
We are living through a recalibration of the way the world organises the plumbing of its businesses and things are changing in ways that even a few years ago would have been impossible to predict. These changes, as ever, spark winners if they are astute enough to seize the initiative and execute on them. Vietnam certainly seems well positioned to be one of them.
