Despite recent market volatility, Vietnam may benefit from the trade war due to an acceleration of manufacturing moving from China to Vietnam.
The first salvos in a trade war between the US and China have been fired, with both countries implementing an array of provocative tariffs. Meanwhile, countries around the world are considering if they might end up as collateral damage. Vietnam, like many emerging markets, does robust trade with both economic superpowers (the US is Vietnam’s top export market while most imports into Vietnam come from China), and as global stock markets have fallen in part due to the uncertainty regarding trade, so too has Vietnam’s.
But Vietnam is in many respects better positioned to withstand any all-out trade war than many emerging markets. Some analysts even say that the country could see benefits from the trade tensions between the US and China, primarily due to an acceleration of manufacturing moving from China to Vietnam.
A protracted trade war could cause the value of the US dollar to increase, making US exports less competitive, and damaging any hope that manufacturing there might make a comeback. Imports would be cheaper than producing goods at home, further exacerbating the US trade deficit.
On the other side, China’s mooted retaliation has been the jettisoning of its US treasury bonds. This has been speculated for many years but could cause the value of China’s currency to soar, making its exports more expensive.
Analysts estimate that in a protracted trade war, the US would take an approximate 1 per cent GDP hit, whilst the impact on China would be around 3 per cent. Both of these numbers are relatively low, given that currency markets would inevitably move dramatically to adjust and compensate for the tariffs.
Where does Vietnam stand?
Although Vietnam runs a significant trade surplus with the US, it is unlikely to be targeted if there were a further escalation. Geopolitical concerns override economic concerns when it comes to the US/Vietnam relationship, and the Vietnamese Prime Minister – the first Southeast Asian leader to be invited for an official visit to the White House last year – witnessed the signing of over $10 billion in commercial contracts on his US visit, a move that undoubtedly helped bilateral relations.
Furthermore, many companies operate under a ‘China plus one’ strategy, whereby they maintain manufacturing operations in China and one other Asian country to manage labour costs, supply chains and dependence on China. Vietnam has increasingly become the ‘plus one’, and some companies might be able to escape US tariffs by producing and exporting from their Vietnamese factories. An ongoing trade war could hasten manufacturing investment in Vietnam.
Vietnam is well-positioned to ride things out
A trade war would certainly be an unwelcome prospect for all parties, but Vietnam’s prospects continue to look solid. GDP is expected to grow around 7 per cent in 2018, and foreign direct investment (FDI) from places like Korea, Japan and other countries continues to flow into the manufacturing sector, further establishing the country’s role as a major production hub in Southeast Asia. For the first seven months of the year, registered FDI stands at $23 billion, up 5.5 per cent over the same period in 2017.
Meanwhile, Vietnam’s domestic consumption story continues to be as compelling an investment theme as ever, as valuations are attractive. One good example is VietJet, Vietnam’s leading low-cost airline, which is expanding both nationally and internationally. Their results for the first half of 2018 showed a 26 per cent increase in pre-tax profit to around $104 million, and the company just handed Boeing a $12.7 billion order. This is but one of the many companies that are reporting robust growth on the back of robust Vietnamese consumer spending.
Currency-wise, the Vietnamese Dong has devalued three per cent against the USD, but that is much less than regional peers who have seen their currencies falter. Inflation remains under control in Vietnam and other macroeconomic indicators remain positive. Vietnam’s foreign reserves now top $60 billion – nearly double what it was two years ago – better positioning the country to manage its currency against external volatilities.
Although a trade war between the US and China brings greater uncertainty to emerging markets, we firmly believe that Vietnam is better positioned than most to weather the storm.
Andy Ho is CIO at VinaCapital.