The allure of investing into a country making its once in a lifetime transition is extremely difficult to resist.
Few doubt that process is accelerating in Vietnam, which is enjoying the heady combination of strong GDP growth (6.4% January to September), favourable demographics (55% of the country are under 34), rising incomes ($2,200 nationwide) and buoyant consumer confidence (the fifth highest in the world according to Nielsen).
But it is not like the market hasn’t been here before – a number of times – and it has always ended badly in the past.
Are investors riding for a fall once more?
That was then
In the mid-noughties, Vietnam was viewed as the last remaining big Asian dragon: a few decades behind China and other East Asian miracles such as Korea and Taiwan because of the devastating civil war, which culminated in the fall of Saigon in 1975, followed by US sanctions, which were only lifted in 1994.
One decade ago, Vietnam could not cope with the capital flows that were unleashed as investors awoke to its potential. The VN Index almost quadrupled in the space of one year, hitting a high of 1,137 points in February 2007.
Two years later, it was below where the rally started, dropping to a low of 245.15 points in February 2009.
This is now
And now it is back at a 10-year high again, closing at 827.72 points on October 17. Having risen 25.67% in the space of a year, Vietnam has outperformed all of its Asean peers, as well as more developed markets across Greater China.
One reason for this outperformance has been Pakistan, which was upgraded from frontier to emerging market status by MSCI in May this year. Vietnam, which remains a component of MSCI's frontier markets index, has long hoped to do the same.
“It’s evident that Vietnam has been the biggest beneficiary, especially as it’s now the largest country in the FM Index,” said Rehan Anwer, managing director and head of frontier markets at Credit Suisse. “That effect is being magnified by Vietnam’s strong economic performance.”
Where the equity market is concerned, Kevin Snowball the CEO of Ho Chi Minh-based boutique investment manager PXP Vietnam Asset Management, also says the rally feels a lot more “mature” this time round, given the market has been on an upswing since 2012.
One key difference between 2007 and 2017 is the market’s valuation. Back then the VN Index was trading around 40 times forward earnings.
Today it is trading around 15 times consensus forward earnings. This puts Vietnam on a par with Asean comps, which have far lower GDP growth profiles.
The one exception is the Philippines, which is trading around 19 times.
The market is also able to absorb capital flows more easily now because it so much bigger and more liquid.
At the beginning of 2007, there were 100 listed companies. Now there are over 1,300 entities across the Ho Chi Minh and Hanoi stock exchanges, plus UPCoM, Vietnam's Unlisted Public Company Market.
Average daily turnover of $180 million over the past year has also now breached the Philippines, one of the TIP [Thailand, Indonesia, Philippines] countries Vietnam aspires to join. The overall market capitalisation has reached $123.96 billion, with Ho Chi Minh accounting for three quarters.
Vincom shops for record
In 2007, the market hit a wall shortly after Vietcombank executed the country’s largest ever IPO, raising $656 million. Market participants are hoping history does not repeat itself as Vincom seeks to beat that record, launching a $680 million IPO at the top of end of its price range on Monday.
Barry Weisblatt, head of research at Viet Capital Securities, is one of a growing number of foreigners, who have moved to Ho Chi Minh City. He highlights foreign portfolio inflows of $641 million into listed equities and $819 million into government bonds in the nine months to the end of September.
“We’ve had positive months here and there over the past few years, but it’s never been as consistent as this and as diverse,” he noted. “We’re seeing flows from Hong Kong, Singapore, Thailand, Japan, Korea, the US and Europe.”
One foreign fund manager, which has become an active player in recent years is Boston-based Eaton Vance. Marshall Stocker runs its Emerging and Frontier Countries Equity Fund and says Vietnam has been his top pick for the past four years.
“Vietnam is doing well in all five of the areas we prioritise,” he commented.
He lists these as: increasing the rule of law (corruption crackdown), soundness of monetary policy (progress in de-dollarisation), trade freedom (18 FTAs signed, or in the works), hospitable regulatory environment (setting up a bad debt asset management company and making it easier to clean out NPLs) and size of government (growing commitment to free market principles and sticking to the 65% debt to GDP cap).
Stocker adds that many emerging market fund managers are now looking in frontier markets for the next undiscovered gem like Vietnam.
Vietnam also remains the recipient of much stronger FDI than its neighbours. This amounted to $19.2 billion during the first half of the year and $23.4 billion in the nine months to the end of September, an increase of 34.3% year-on-year.
Only Indonesia comes close, on $15.5 billion over the first half of 2017. Thailand and the Philippines are much further behind on $4.6 billion and $3.6 billion respectively.
Almost half of Vietnam’s FDI is being channeled into the processing and manufacturing sector, with many of the world’s biggest electronics companies shifting from China to take advantage of lower labour costs. Leading the pack is Samsung Display, which has committed $2.5 billion in new FDI this year.
As a result, exports are now 86% of GDP, up from 10% when Vietnam began its open door policy (Doi Moi) in 1986. Notwithstanding the demise of the Trans Pacific Partnership after Donald Trump became US president, Vietnam has signed, or is negotiating, 18 other free trade agreements.
“GDP per capita has risen above $5,000 in some urban areas,” commented Bang Trinh, a former country head at Morgan Stanley. “That’s now above the $3,000 level when economic take-off really accelerates.”
PE funds multiply
One sure sign a country or a sector is becoming an investment hit is when investment bankers from Morgan Stanley and Goldman Sachs branch out on their own. And that is what Trinh is now doing, joining a Greater China and Vietnam focused private equity fund, Rivendell Partners, in July.
His near term concern is that valuations could run ahead of themselves once more.
“There’s a lot of capital chasing opportunities and a danger that investors’ margin of safety will be squeezed,” he commented. “However, it’s noticeable how deals are being structured with more downside protection than they were a few years ago, including minimum return hurdles and put options back to the company.”
Likewise, Terry Ting, former head of growth private equity for Asia ex-India at Goldman Sachs, has just set up Valence Capital Asia, a private equity firm focused on China and Vietnam. He believes that all the factors, which powered the East Asian miracle in Korea, Taiwan and China, are present in Vietnam.
“The Vietnamese share what I’d loosely call the same Confucian background,” he commented. “They’re an entrepreneurial people who are ethnically homogenous, speak the same language and have the same belief system.”
Some believe Vietnam is also better placed than China was 20-years ago because it is more open to foreign investment and was only under the dead weight of central planning for one generation (first five year plan in 1976) compared to three in China (first plan: 1953).
Others like Terry Mahony, vice chairman of VinaCapital, wish Vietnam had the ability to engage in the kind of long-term planning which has marshalled China's resources and built its infrastructure.
Vietnam also has a population of 92.7 million compared to China’s 1.379 billion. The country’s favourable demographics will turn within the next decade, putting the government under pressure to sort out the public sector before it pulls the economy down.
Pham Hong Hai is HSBC’s first-ever local country manager in Vietnam. He worries that Vietnam is still emphasising cheap labour at a time when other countries are focusing on improving their educational standards to create a more technologically literate workforce.
“Productivity is on a declining trend,” he stated. “As Vietnam is one of the fastest aging countries, urgent actions are required to improve productivity and sustain growth so the country can generate enough capital to invest in the infrastructure it needs."
It is also unclear whether the burgeoning private sector will be able to avoid the same traps which led the rest of the region down the path to the Asian Financial Crisis of 1997, including crony capitalism and excessive debt.
Government reform thyself
At the moment, it is the government, which is hitting its debt constraints. At close to 65% of GDP (including contingent liabilities), public debt is higher than Asean neighbours and the government is under pressure to cut its fiscal deficit (6.5% in 2016) with an ambitious privatisation programme that could raise $8 billion over the next few years according to Dragon Capital forecasts.
Vietnam experts all credit the country's relatively new prime minister, Nguyen Xuan Phuc, with being business friendly and anti-corruption. But in Vietnam’s consensus-driven government, that message is taking a long time to filter down the ranks.
In 2016, Transparency International billed Vietnam as Asia’s second worst country for bribery: a function of a very large cadre of government officers on very low “official” salaries. Vietnam's corruption is also often described as the "inefficient" or capital destructive kind that countries like Malaysia have long specialised in.
For many, the hope lies with the post 1975 generation, now in their 40s, who are heading to the top of the government ranks. Kelly Wong, group CFO at fast moving consumer goods company (FMCG) Kido Corp, said, “Many of them are Western educated. They have the self-awareness that comes from growing up during a period of scarcity, but the confidence to deal with foreigners.”
Tran Qui Thanh, founder of fellow FMCG Tan Hiep Phat Beverage, echoes a similar thought.
He comes from an earlier generation and was part of the group who stayed in the country following the mass migration post 1975. Thanh's story is similar to many Chinese tycoons who fought their way to the top through sheer hard work and determination.
“It's a completely different landscape now,” he concluded. “Vietnam is far more open for business and I have a great deal of faith in the next generation of government. They're breaking the mould of years gone by and are focused on transforming the economy."