Andy Ho outlines the many reasons why the country is attractive to foreign investors.
The prospects for Vietnam’s stockmarket are outstanding, driven by the country’s sustainable economic development, and by the attractiveness of the market to foreign investors.
Local business leaders and workers alike can rest assured that Vietnam’s robust economic development over the next 10 years is more or less assured by a combination of several factors, including: industrialisation, urbanisation, and a continuation of the ongoing emergence of a vibrant middle class.
Regarding industrialisation, manufacturing contributes nearly 20% of Vietnam’s GDP, but during the development of every other Asian Tiger economy (for example, Japan, South Korea, and Taiwan), the contribution of the manufacturing sector exceeded 30%.
Vietnam’s industrialisation story clearly has longer to run, with manufacturing likely to continue growing at a double-digit pace, fuelled by 8%/GDP foreign direct inflows (FDI), which is among the highest rates of FDI inflows in the world.
Regarding urbanisation, only about a third of Vietnam’s citizens live in its major cities today, versus more than half in China, so Vietnam’s circa 3% annual urbanisation rate is among the highest in Asia.
Urbanisation is being driven by employment opportunities in the cities and industrial parks, where wages are higher than those of the circa 45% of Vietnam’s workforce who are employed in agriculture.
In future, we expect urbanisation to increasingly be driven by rises in Vietnam’s agricultural productivity, which is only about half that of Thailand's, because we anticipate small farms being aggregated into larger, more efficient farms when the children of those former small-scale farmers move to the cities seeking more attractive employment.
An important things to note is that industrialisation and urbanisation in Vietnam are intertwined, and that these positive factors are helping to drive the emergence of a vibrant middle class.
Another important factor is Vietnam’s demographics, which are currently amplifying the country’s GDP growth, and likely to continue augmenting growth for the next 10 to 15 years.
However, the boost that Vietnam is currently enjoying from its “demographic dividend”, will turn into a drag on growth about 20 years later. VinaCapital believes that the development of a proper pension industry in Vietnam is essential to ensure the country’s growth at that critical juncture, when the demographic dividend turns into a “demographic drag”.
Anaemic growth elsewhere
All the fortuitous factors discussed are very interesting to foreign investors at a time when growth is expected to slow dramatically in the US, China and South Korea due to demographics and other issues, and when growth is already anaemic in Japan and Europe.
Most pension funds in the developed world expect to earn 6% to 7% investment returns every year, but this target is probably going to become harder to achieve in the next few years, which should encourage more investment capital flows from developed world countries into high-growth countries such as Vietnam.
One area that we think foreign institutional investors will be increasingly drawn to is the corporate bonds of Vietnamese companies, given the high creditworthiness of most large companies.
We urge the government to take steps to further develop the local bond market as a way to facilitate the channeling of the savings of both local and international savers to Vietnamese corporations, which will help those companies continue to grow.
Finally, in order for Vietnam to realise its potential, it is imperative that the country’s FX rate remains stable, with maximum 1% to 2% annual depreciations in the value of the Vietnamese dong. We are encouraged by the steps that the State Bank of Vietnam (SBV) has taken in recent years to ensure the stability of the USD/VND exchange rate.
In the 1990s, China’s central bank made a strong effort to maintain a stable value of the country’s exchange rate in the aftermath of the Asian financial crisis, and China was subsequently, generously rewarded for those efforts in the 2000s because ample foreign investment poured into the country – bolstered by investors’ confidence about the stability of the yuan. We believe that Vietnam’s government should carefully heed the lessons of this.
Other steps that the government could take to encourage foreign inflows include further liberalising foreign ownership limits, accelerating the privatisation programme, and taking the necessary steps to have Vietnam upgraded from the MSCI-Frontier index to the widely followed MSCI-Emerging Markets Index, which could easily prompt another $5 billion of foreign inflows to Vietnam’s stockmarket, and send the market 30% higher in a matter of months.
Andy Ho is the chief investment officer of VinaCapital.