BizNEWS

Vietnam Remains one of the Best Long-term Growth in Asia, Experts Say

Diep Nguyen
BizLIVE -

Vietnam (remain positive). Vietnam is one of the best long-term growth stories in Asia and is our most preferred frontier market. There is a long list of reasons why we remain positive on the country’s equity market.

Vietnam Remains one of the Best Long-term Growth in Asia, Experts Say
Photo: Accor
HSBC recently released a report in which HSBC analyzes the motivations and momentums of the Vietnam’s economy and gives out some predictions. 
Vietnam (remain positive). Vietnam is one of the best long-term growth stories in Asia and is our most preferred frontier market. There is a long list of reasons why we remain positive on the country’s equity market. They range from the healthy state of foreign direct investment, rising share of global exports, the country’s impressive handling of the COVID-19 crisis and higher levels of government investment, to policy reforms which will increase foreign ownership limits and a consistent reduction in debt levels among listed companies. Stocks are cheap, too. 
The one caveat is that the Vietnam market is driven by local retail investors, so near-term movements are not always based on fundamentals. Having said that, we think any decline should be seen as an opportunity to accumulate. Given the strong growth momentum, we believe foreign investors do not have to dig deep to generate alpha. 
From past performances, they are better off sticking to market leaders. Also, large-cap stocks are best positioned to handle the disruption caused by COVID-19 and should benefit from the country’s rosy long-term economic prospects.
Why we are positive on Vietnam
In our recent note, Pho’nomenal Vietnam: The story keeps getting better, 28 May 2020, we argued that Vietnam is no longer just an outsourcing supply chain success story with a fortunate geographical location. It is assembling a home-grown economic growth engine that is making it an even more attractive destination in its own right.
Since that report was published, local COVID-19 infections have increased after three months of no local transmissions. Vietnam is not alone in this: Hong Kong, which had also largely contained the virus, has also seen a significant rise in cases recently. This shows that COVID-19 risks are far from over and investors need to position themselves accordingly. In this light, if there were a new wave of infections in Vietnam, we believe it could still be relatively better off given that the situation is worse in many other markets and regions. 
Also, we believe Vietnam will continue to gain market share in global exports, even if the size of total global exports decline. We remain positive on Vietnam because: 1) FDI, the key driver of the country’s growth, should accelerate; 2) the economy is now getting back on track – 2Q GDP grew 0.4% y-o-y despite lockdowns and the impact of COVID-19; 3) higher public investment could help boost demand in the economy in the near term; 4) reforms like SOE equitisation and a new securities law are under way, and the government has amended its securities law to provide a more level playing field for foreign investors. 
It has also proposed draft amendments to its investment law and companies’ law which should help provide the regulatory framework to increase foreign ownership limits; and 5) listed companies (ex-financials) have reduced their leverage in the past five years and have a low net debt to equity of 18%, which reduces risks for the market. 
On the valuation front, the market looks cheap and trades at a 12m trailing PE of 12.8x, below its 5- year average of 15.7x.
It’s important to note that Vietnam’s equity market is driven by local retail participants and as such near-term movement of the market depends less upon fundamental drivers. We would view any decline in the market as an opportunity to accumulate. We believe that FDI, the key driver of Vietnam’s growth, should accelerate: 1) Vietnam is party to a number of free trade agreements (FTA); 2) outside China, the country is one of the most attractive destinations for overseas companies; 3) Vietnam is moving up the value-added ladder; 4) it provides an attractive trade-off between cost and productivity; and 5) COVID-19 and increasing US-China trade tensions should accelerate the process of companies rejigging their supply chains.
Vietnam recently ratified its FTA with the EU which should reduce duties to 0% on 71% of its goods, rising to 99% in seven years. This should be positive for Vietnam’s exporters in sectors like electronics and textiles. The COVID-19 pandemic and US-China trade tensions have made companies look at the need to diversify their supply chains. For example, Japan recently announced a first list of companies it will subsidise to relocate from China to Japan or South East Asia. 
News reports suggest 30 companies plan to move to South East Asia. Half of these could move to Vietnam to produce medical equipment, semiconductors, phone components, air conditioners and power modules1. In our note, Pho’nomenal Vietnam: The story keeps getting better, 28 May 2020, we highlighted that companies were already moving to Vietnam because of lower costs, favourable tax policies, geographic advantages, relatively better infrastructure, and a young and skilled labour force. All these factors have led Vietnam to increase its share of global exports from 0.5% in 2009 to 1.4% in 2019. Trade tensions and COVID-19 have only accelerated the shift.

DIEP NGUYEN