Knowledge. Shared Blog

April 2020

Vietnam: The New Frontier in Emerging Markets?

As some emerging market economies begin to slow, Vietnam could be at the beginning of a multiyear growth cycle. Daniel Graña, Portfolio Manager, Emerging Market Equity, explains why he thinks Vietnam’s outlook is so positive and why investors should take note.

Key Takeaways

  • 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, we believe the country is moving in the right direction.
View Transcript

Daniel Graña: In a world where a rising tide is not necessarily going to lift all boats, not all emerging markets are going to grow equally fast.

Vietnam is one of those countries that I would suggest investors look at as a future fast-growing emerging market, because it offers a lot of the same ingredients that investors 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 lower value-added industries –shoes and garments – have to look for a home. Vietnam is one such home. But it is not just about shoes and clothes in Vietnam. Samsung Electronics, 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, they 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, 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. These are companies making very long-term investments. So, if you compare Vietnam on a foreign direct investment-to-GDP 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 are growing faster on a topline basis, companies are 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 multiyear growth story. And so, for all those reasons, faster economic growth generally leads to a better investment-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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