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Why Vietnam still attracts emerging-market bulls

Why Vietnam still attracts emerging-market bulls

09/19/2017

By William Watts, MarketWatch

Foreign investment fuels boom

Sunday marked the debut on PBS of Ken Burns and Lynn Novick's "The Vietnam War" (https://www.wsj.com/articles/the-vietnam-war-review-finding-humanity-in-a-slo-mo-disaster-1505408291), kicking off what promises to be an exhaustive and illuminating 10-part examination of a conflict that still casts a shadow over the American psyche more than four decades after U.S. forces exited the conflict.

Vietnam faced economic chaos following the fall of Saigon in 1975 and the unification of the country under a Communist government. In 1986, the government instituted a number of far-reaching reforms after a severe economic crisis. In the 1990s, the country began increasing economic relations throughout the region and the world. This included a trade agreement with the U.S. in 1992 and membership in the World Trade Organization.

While the economy picked up steam, the path remained bumpy. Vietnam was relatively insulated from the chaos of the 1998 Asian economic crisis due to its small size. But the nearly two decades since has seen chaotic periods of boom and bust, as well as the bursting of a property bubble in 2011. Still, the country's economy has grown at an impressive clip of around 6% a year.

While Vietnam has embraced free markets and outside investment, it remains a one-party state, ruled by arguably one of the most authoritarian regimes in Southeast Asia. Human-rights groups have expressed alarm over the country's biggest crackdown on activists in years, Reuters reported (http://www.reuters.com/article/us-vietnam-arrests/vietnam-jails-dissident-for-five-years-in-crackdown-on-activists-idUSKCN1BT0P1).

Investors, however, are encouraged by the long-run economic outlook and point to factors including a well-educated workforce and a high degree of openness to outside investment.

While a high debt-to-gross domestic product ratio of 62% and the lack of a current-account surplus give some investors pause, low labor costs and a highly specialized workforce have allowed Vietnam to become a key part of Southeast Asian supply chains, wrote analysts at Pavilion in Montreal.

The result has been a substantial jump in foreign direct investment, or FDI, by the country's largest trading partners, including Japan and South Korea, in the last few years, they noted. Indeed, South Korea's Samsung Electronics Co. Ltd. (005930.SE) is Vietnam's largest exporter, according to Bloomberg, accounting for around 20% of the nation's shipments in 2016.

That uptick in FDI explains why growth indicators in Vietnam have outpaced other Asian economies, such as Indonesia and Malaysia, that have similar levels of competitiveness, the Pavilion analysts said in a late August note.

Moreover, strong FDI means factories are being built. The new jobs generally offer a leg up to workers, but what's often overlooked is how they also serve to put upward pressure on wages across the lower end of the economy, said Robert Harvey, portfolio manager at Matthews Asia, where he co-manages the Matthews Emerging Asia fund .

The Vietnam Ho Chi Minh stock index is up 21.2% in 2017, but lags behind the MSCI Emerging Markets index, which is up nearly 28%. The iShares MSCI Emerging Markets ETF (EEM) on Monday hit a six-year high (http://www.marketwatch.com/story/emerging-market-etf-hits-6-year-high-as-china-tech-outshines-2017-09-18).

And then there is China. Hanoi and Beijing have long had a wary and, at times, tense relationship. But economically, it's no surprise, as the Pavilion analysts note, that small jumps in Chinese economic activity translate into large swings in Vietnamese exports.

That's a double-edged sword, but the exposure to China should be a positive, Pavilion said, arguing that the recent rally in industrial metals prices underscores the idea that China is again supporting growth.

Harvey at Matthews favors companies that are exposed to Vietnam's consumers, arguing that they're ability to raise prices, along with lower capital requirements, give them an advantage. While prices of commodities that such companies use as inputs can move faster than the firms can reprice, margins can recover quickly, he said.

The Pavilion analysts argue that Vietnam's stock market is the best way to play the country's growth story, noting Vietnamese stocks had outperformed regional peers and other export-oriented economies until 2016, when slower growth caused Vietnam's market to stall.

They noted the MSCI Vietnam Index is comprised mainly of consumer staples (55%), real estate (19%), and financials (9%).

"Consequently, it is more reliant on domestic and regional growth than global commodity prices, especially compared to most frontier indices," they wrote.

-William Watts; 415-439-6400; AskNewswires@dowjones.com

 

(END) Dow Jones Newswires

09-18-17 1415ET

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