As some emerging market economies begin to slow, Daniel Graña, Emerging Market Equity Portfolio Manager, explains why he thinks Vietnam’s outlook is positive and why investors should take note.
Some emerging market economies have started to mature, leading to slower growth. But Vietnam could be one notable exception.
The country is capturing an increasing share of foreign direct investment, thanks in part to an educated workforce and improved infrastructure. Such investment could help create an appealing cycle of wage growth and topline expansion.
However, Vietnam is still a frontier market, so investors must consider liquidity, governance and accounting standards. Even so, the Emerging Market Equity Team believe the country is moving in the right direction to becoming a fully investable market.
In a world where a rising tide is not necessarily going to lift all boats, not all emerging markets are going to grow as fast.
Vietnam is one of those countries where I would suggest investors look at in terms of the future of a fast-growing emerging market. Because they offer a lot of the same kind of ingredients that investors saw and companies saw 20 or 30 years ago in China. A government that is attracting capital, a country that is attracting companies to invest and replace, perhaps, the more expensive supply chains in China.
As China moves up the value-added curve, a lot of the sort of lower value-added industries – the shoes and the garments – have to look for a home [for production]. Vietnam is one such home. But it is not just about shoes and clothes in Vietnam. Samsung for example no longer manufactures phones in China, they manufacture exclusively in Vietnam. So even in higher-tech stuff, companies are moving to Vietnam.
Vietnam is potentially following the same path that Japan, Korea, Taiwan and China did through economic development. Export-led development is certainly one path that a country can choose to go from low income to middle income to high income. And, certainly, all the ingredients are there for that to happen in Vietnam.
Vietnam has invested in infrastructure. Vietnam has a very educated workforce.
And, so, as foreigners open factories for export, you hire lots of people, pay them better wages, and suddenly they have the wherewithal to take out a mortgage, to buy a car, to take out a credit card. And suddenly it is where the virtuous cycle begins.
And that has led to, very much, Vietnam winning the global market share gain of foreign direct investment. This is not capital markets deciding to buy stock. This is a company that is making a very long-term investment. So, if you compare Vietnam on a foreign direct investment-to-GDP [gross domestic product] ratio, which is one metric to measure this against its peers, it is clear that Vietnam is doing an excellent job in attracting capital.
As a result, Vietnam is growing faster than its peers. And growing faster than peers, it should be attractive to investors. Companies would be growing faster on a topline basis, companies would be investing, they are able to raise equity capital easier to attract the attention of investors, because there is a growth opportunity that isn’t one or two years; it is a multi-year growth story. And, so, for all those reasons, faster economic growth generally leads to better investing picking pool for investors.
Currently, Vietnam is not in the emerging market benchmark, it is in the frontier index. And, clearly, we have to talk about differences in governance; differences in transparency and disclosure and accounting standards; business practices. And, so, obviously, an investor would have to consider things like liquidity: Are there audited financial statements? We would need to see more capital markets reform, we would need to see companies accepting, understanding what is expected by foreign institutional investors before Vietnam becomes fully investable. But, certainly, the direction of travel looks very attractive.
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