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It's time to invest in Vietnam

Vietnam’s economy is booming. Citywire Asia speaks to top investors about what they’re looking to back in one of Southeast Asia’s most exciting countries

Mark Mobius, executive chairman, Templeton Emerging Markets Group, Franklin Templeton Investments

There are many investment opportunities in Vietnam. We are currently accessing the market through a number of different strategies. For example, one strategy has invested in sectors such as food and services, as well as manufacturing.

In other strategies, we have investments in the food industry and in conglomerates participating in a wide range of activities, from property to banking. You can probably name any industry and we could find an opportunity in Vietnam.

With per capita income continuously rising over the past few years, one of the most exciting drivers for investment in Vietnam has been increased consumption. This growth can been seen in the expansion of supermarkets, hypermarkets and convenience stores all over the country.

There are significant challenges ahead before Vietnam can gain inclusion in the MSCI Emerging Markets index. First, there has to be more openness to foreign ownership and the lifting of foreign ownership limits. The barriers to this happening are connected to the willingness of the government to privatise and sell more shares in state-owned enterprises.

There is also a certain lack of clarity with regards to the distinction between local and foreign-owned firms. This is probably because of the distinction made between Vietnamese individuals who return from overseas with foreign citizenship and those individuals and companies who are not ethnic Vietnamese.

There is also the issue of equal rights for foreign investors. Much of the corporate law in Vietnam has not been available in English, and there does not seem to be any obligation to supply an official English translation of the law.

The final – and probably the most important – challenge is the need for foreign exchange market liberalisation. While capital inflows are easy, outflows are not and this creates a great deal of uncertainty for foreign investors.

In conclusion, while Vietnam is in pretty good shape when it comes to the stability of its institutional framework, it has to improve on the other three components used by MSCI to evaluate a market. There is no question that an upgrade and inclusion into the MSCI Emerging Markets index could result in more equity inflows for Vietnam. The recent experience of the UAE and Qatar in gaining emerging market status shows that once it is implemented, there is market appreciation.

Given that around $1.6 trillion in assets under management track the MSCI EM index, compared with about $16 billion tracking the MSCI Frontier Markets index, there is definitely the possibility of greater inflows if Vietnam graduates from frontier to emerging market status. Many index-tracking funds and ETFs are tied to that index and are forced to invest in the constituent countries in order to mimic it.

The article appeared in the November issue of the Citywire Private Wealth magazine.

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Oliver Lee, investment director, Old Mutual Global Investors

Vietnam has favourable demographics, with 50% of the population under the age of 30, a growing middle class and a literacy rate of 90%. The country has stable inflation, a surplus current account, strong exports, and the world’s second-highest GDP growth rate in 2017 so far. It’s a huge beneficiary of  foreign direct investment flows.

Companies such as Samsung have invested heavily in the country. Politically, the country is gradually becoming less corrupt under the new prime minister, who was appointed last year. The country has a reasonable supply of natural resources and a large coastline, which is beneficial for exporting.

Vietnam has cheaper equity valuations than wider emerging and developed markets, with which they also have historically low correlations.

The country is generally under-researched by sell-side analysts and can therefore be a good source of differentiated alpha.

The market seems comfortable with Vietnam right now. Our key investment  ideas are the infrastructure sector, given primitive roads and airports need substantial investment to facilitate growth; select financials, where non-performing loans are bottoming out and credit growth is expanding; and individual stocks trading on single digit price/earnings ratios in the fertiliser, consumer detergents and chemical businesses.

At $100 billion, the Vietnamese market is still quite small, but it is gradually being taken more seriously. In terms of size and liquidity, Vietnam was arguably more qualified than Pakistan to be included in MSCI Emerging Markets indices. However, the key barrier was openness to foreign ownership. We expect to see further progress in 2018/2019. Other developments that  could boost Vietnam’s chances of inclusion are adherence to international accounting standards and further progress on deepening the derivatives market and improving the IPO process.

We expect to see Vietnam on the MSCI review list over the coming years.

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Caroline Keen, portfolio manager, emerging market and Asian equity team, BNY Mellon's Newton Investment Management

Broadly, we are positive on the Vietnamese economy, but there are still hurdles to investment, including liquidity, market access, regulation and state  intervention. We have not yet made any direct investments in Vietnamese companies in our Asia Pacific or global emerging market strategies, but we do own companies that have operations in the country.

Investing in Vietnam provides an interesting opportunity to participate in capital market reform. However, for us this isn’t a reason to invest in itself: we have to find companies that provide a better risk/reward opportunity compared with stocks already in our portfolios.

Capital markets will have to develop because the government needs to recapitalise the banking system and reduce its fiscal balance. Monetising equity stakes in state-owned enterprises (SOEs) is the way to do this, but owing to a lack of local institutional investors, opening up access for foreign investors will be important.

In the past, the government has been very interventionist, and the capital market in Vietnam is still very much ‘frontier’. There are still limits on foreign ownership, but the responsibility for lifting these restrictions has been passed to the companies themselves rather than the government. There are still restricted industries and the government has not made it easy to interpret the rules.

In addition, the banking system is clogged up with a legacy of bad debts following the global financial crisis, which is causing a drag on the economy. The predominant source of these issues was the state-owned banks lending to SOEs, which bought agricultural land from corrupt officials at commercial rates on the promise that it would be rezoned and developed. This never happened, and the SOEs have been ‘zombies’ ever since, while the banks deal with the associated debt. There has been some financial sector reform; a full-scale recapitalisation is really needed, but is a sensitive topic for obvious reasons.

There is no developed pension fund in Vietnam at the moment and therefore local institutional investors are scarce. Money-supply growth has grown faster than credit growth, so there should be free liquidity to flow into the equity market. However, there is limited financial inclusion: the penetration of bank accounts is somewhere around 20% or 25%, and the majority of the population like to buy gold or keep their savings under the mattress. All of this means that opening up access for foreign investors will be key for developing the country’s economy.

Given the government’s need to monetise its assets to recapitalise the banking system and sustain a high growth rate, the capital market reform agenda appears to be serious. The secondary placings planned over the next few years will require foreign participation and the market will therefore have to develop.

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Kok Fook Meng, associate director, Asian equities, Lion Global Investors

Vietnam is an emerging economy and offers attractive long-term growth potential. As the nation has a potentially large consumer market, one important theme is consumption. Vietnam’s currently low GDP per capita is set
to rise as its economy grows, and this will increase the number of middle-income earners, boosting consumption growth.

What’s more, because of the need for significant spending to support the economy, infrastructure is another important investment theme we are looking at. We will continue to invest in Vietnamese equities using a bottom-up stock-picking approach, selecting companies with strong fundamentals that could benefit from Vietnam’s attractive medium- to long term growth potential.

However, we are also aware of macro and external influences, which may have a significant short-term impact on stock prices. We favour the consumer sector, which benefits from rising income and an expanding middle-income pool – a trend that we expect to see continue. Within this sector, we look for companies that are market leaders, which can exploit changes in consumer habits and have the management capabilities and capital to quickly capture opportunities.

We also like infrastructure firms that own roads, bridges and airports; they are well placed to benefit from Vietnam’s economic growth and the growing need for infrastructure investment.

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