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 growth – lots of growth potential.
Perhaps add economic numbers like inflation and interest rates on a declining trend to that list.
Political stability, low valuations coupled with low costs, and increasing flows of capital would also be nice.
Of course, we’ll never find the perfect market. There’s always risk with any investment, and there are 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 first.
Like China, it has an authoritarian communist government and all the negatives that come with it. Fortunately, however, investors have the flexibility to sidestep the country’s state-owned enterprises and focus instead 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.
- A talented, well-educated, ambitious population with great faith in their future.
- Low real wages for a decisive competitive advantage.
- Tremendous opportunities for market reforms to unlock blocked potential.
- Low valuations and rising, robust foreign investment to drive its industry and stock market forward.
Now, let’s take a closer look at some of these advantages and more…
Significant Catchup Potential With Neighboring Countries
Vietnam has a long way to go before it catches up with neighbors such as Thailand in terms of urbanization, per capita income, and the size of its stock market and manufacturing base.
About 70% of Vietnamese still live in rural areas and remain involved in agriculture so, just like during China’s rise, urbanization will supercharge growth and incomes.
Improving Macro Fundamentals and 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 remains pretty stable in the 6% to 7% range.
Vietnam’s infrastructure is improving as well 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 include bank debt and non-performing loans. It’s 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 reign in government spending.
Low Stock Valuations Relative to Its Competitors
For some reason, many of Vietnam’s large state-owned companies are expensive, but medium-and small-sized companies are a terrific value. The trailing price-to-earnings (P/E) ratio for this group is just 7.8 compared to 26.9 in Indonesia and 21.3 in the Philippines.
The Vietnam market index trades at just 1.1 times book value with a dividend yield of 6.3% while Indonesia has a 2.4 times book value and the Philippines has a 2.6 times book value.
Excellent Demographics Signal Long-Term Growth of Income and Wealth
In contrast to China’s premature graying society, Vietnam’s population of 98 million is at a demographic sweet spot with an average age of just 27 years and 70% of the population under the age of 35.
Wealth has risen at an annual compounded rate of 13.5% over the last decade, meaning Vietnam’s consumer and investor class is expanding every year.
The literacy rate is 94%, with primary education improving every year.
Geographic and Strategic Importance at the Heart of ASEAN
If the Trans-Pacific Partnership (TPP) passes muster, Vietnam will likely 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, its position facing the South China Sea, and shipping lanes that account for 40% of global trade – all underline its strategic importance.
Vietnam’s cooperation with America is also 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, driven by many factors including wage rates significantly lower than in China. Companies in South Korea, Japan, China, America, and Europe, and their governments, are falling over each other to establish manufacturing hubs and 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 flowing into Southeast Asia than into China – $60 billion of direct investment has flowed to Vietnam over the last five years with $14.5 billion in 2015. In April this year, foreign direct investment surged 85% year over year.
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GBS - Notable improvements have been made to tax and admin procedures a year since the PM's first official meeting with local businesses.
Vietnam has taken significant steps to improve its business environment since an official meeting between Prime Minister Nguyen Xuan Phuc and local companies in April last year.