26th October 2015
Ryan Lightfoot-Brown, Research Analyst
Frontier markets – Vietnam
In the third and penultimate blog in my mini-series on frontier markets, I will be looking at Vietnam – a country many still think of in terms of its eponymous war with the US in the 1970s, or the destination of choice for 'gap years', rather than as an investment opportunity. However, for many reasons, it is now being dubbed the 'new China' of the Southeast Asia region. So what is drumming up such adulation?
Firstly, there is the strong GDP growth. Vietnam has been producing consistent numbers and growing the economy steadily by 5-7% in the past few years. This momentum has pushed the size of the economy over $180bn – almost the same as New Zealand.
A lot of these gains have been derived from considerable foreign direct investment (FDI), which has found its way to Vietnam as a consequence, at least in part, of the changing economic landscape in China. Many multinational firms have redirected their manufacturing plants out of China and into Vietnam to take advantage of the lower labour costs and favourable demographics - the Vietnamese population is largely more educated and skilled than equivalent frontier markets such as Bangladesh, Ghana and Jamaica, to name a few, with 60% of the estimated 90 million population of working age.*
While this is a familiar story amongst frontier markets, Vietnam is especially unique due to its geographic positioning: it can take advantage of the networks already in place with China. It also has fewer 'red-tape' restrictions and rapid construction times. On average, it takes just 114 days (less time than from here to Valentine's Day!) to build a factory. Firms that have already established manufacturing bases there include Ford, Intel and Samsung.
Because of this, many jobs have been created in Vietnam, improving the general wealth of the country and increasing the 'middle class' demographic who tend to spend this wealth, and drive the economy further. FDI also has a positive knock-on effect, resulting in improved infrastructure and education standards, as employees undergo further training.
For investors, there is more good news. The government recently removed the cap in some sectors for overseas investors, which previously stated they could only hold up to 49% of a listed company. While some sectors - most notably the banking sector – were not included in this relaxation, it does now allow for much more foreign investment in the market.
However, the stock market is still very small, with a total market cap of just $50bn. To put this into context, the entire stock exchange is worth less than British Telecom, which makes up about 2% of the UK stock exchange**. This means that there are only a small number of local investors and opportunities, and often the same 'big names' are held in portfolios.
There are some funds that have already identified the huge growth potential of the country, and have done their best to avoid the potential pitfalls there could be. For example, T.Rowe Price Frontier Markets fund has Vietnam as its largest holding. Soon-to-be Elite Rated Matthews Asia Pacific Tiger also invests in the country.
* Source: IMF, 2014 as measured by GDP.
** Figures from FTSE.com, correct as at 30 September 2015.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Ryan's views are his own and do not constitute financial advice.
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