Growing Vietnam Economy Could Overtake China
President Barack Obama’s visit to Vietnam last week was the latest sign of warming relations with America’s one-time foe. This week’s Global Guru is a guest column by Asian expert Carl Delfeld which highlights the investment opportunities in this fast-growing Asian nation that easily rival those of the overleveraged Chinese market.
Wouldn’t it be great if you could create an ideal market to invest in out of thin air?
Right off the bat you would want lots of growth potential. Perhaps you also would want economic numbers like inflation and interest rates on a declining trend. In addition, political stability, low valuations coupled with low costs and increasing flows of capital also would be nice.
Of course, we will never find the perfect market. There is always risk with any investment and flaws to even the best story. But looking over the world right now, the best market I can find is Vietnam.
Let’s put the major negative to the Vietnam story out on the table. Like China, it has an authoritarian, communist government and all the negatives that come with it. Fortunately, investors have the flexibility to sidestep the country’s state-owned enterprises and focus on smaller private companies that are on a high-growth trajectory.
The list of Vietnam’s positives is really quite impressive. Here are just a few for starters: a low level of capital stock — so every dollar of investment yields big jumps in productivity; attractive demographics to fuel consumption; talented, well-educated and ambitious people with a great faith in their future; low real wages for a decisive competitive advantage; tremendous opportunities for market reforms to unlock blocked potential; and low valuations and rising, robust foreign investment to drive its industry and stock market forward.
Significant catch-up potential with neighboring countries
Vietnam has a long way to go before it can catch up with neighbors such as Thailand in terms of urbanization, per capita incomes, size of its stock market and manufacturing base. About 70% of Vietnamese still live in rural areas and are involved in agriculture. So just like during China’s rise, urbanization will supercharge growth and incomes.
Improving macro fundamentals & infrastructure
The country’s macro picture is considerably better than five years ago. Foreign reserves have tripled to $34 billion. Interest rates have come down from 20% to 8%. Inflation has fallen from 18.7% to just 0.6%. Meanwhile, annual economic growth has been pretty stable in the 6-7% range. Vietnam’s infrastructure is improving with 267,000 km of roads and 1.49 cell phones per person. The economy is well diversified and the country is rich in resources and has become an energy exporter.
Market reforms in banking and finance
Significant issues for Vietnam are bank debt and non-performing loans. The country is making incremental progress but much more needs to be done to open and modernize its financial system. It also needs to move forward on plans to privatize 289 state-owned companies. In addition, Vietnam has to rein in government spending.
Low stock valuations relative to competitors
Geographic and strategic importance at the heart of ASEAN
If the Trans-Pacific Partnership (TPP) passes muster, Vietnam likely will be the greatest beneficiary. As the recently founded ASEAN Economic Community (AEC) moves forward, intra-ASEAN trade, already growing fast, will gain even more momentum. Vietnam’s long coastline, positioned facing the South China Sea and shipping lanes that account for 40% of global trade, underlines its strategic importance. Vietnam’s cooperation with America is deepening as it seeks a hedge on China’s growing weight in the region.
Low-cost base for manufacturing and services
A wave of capital is washing over Vietnam that is driven by many factors, including wage rates significantly lower than in China. South Korean, Japanese, Chinese, American and European companies and their governments are falling over each other to establish manufacturing hubs and to seek better relations with Vietnam.
One example is the Japanese government’s recently announced $1.7 billion aid package to Vietnam. During the last three years, there has been more foreign direct investment flows into Southeast Asia than into China. Indeed, $60 billion of direct investment has flowed to Vietnam over the last five years with $14.5 billion in 2015 alone. In April of this year, foreign direct investment surged 85% year over year.
Below are some of the foreign investment projects announced during March of 2016:
Samsung R&D Center – $300 million
Zincox Resources steel plant – $115 million
Nestle’s 6th factory – $70 million ($520 million total)
LG Display doubling manufacturing base – $1.5 billion.
Here are just some of the blue-chip companies increasing production in Vietnam.