Vietnam: Industrialization in an evolving economy

 

Ho Chi Min city

One of the biggest structural trends in frontier markets is the rise of the “new China.”

What is the new China, and how is it good for investors? The new China is the movement of light manufacturing factories from (mostly) southern China to frontier countries, primarily countries in Southeast Asia, including Vietnam, Cambodia and Bangladesh (as seen in the export index in Chart 1).

Chart 1: Export index by frontier country
Chart 1: Export index by frontier country
Source: Emerging Markets Advisors.

Factories are leaving China due to a combination of a Chinese government policy that favours high value-added manufacturing (robots, airplanes, cars, etc.) and lower processing costs in frontier countries. This event is historically similar to past phases of industrialization, which saw the movement of factories from England to the U.S. in the late 1800s, and from the U.S. to Asia in the latter part of the past century.

Now it’s Vietnam’s turn to undergo this change, and in my view, focusing on hard-currency light manufactured exports (versus simple raw-material commodities) is one of the best means to help a country develop economically.

As seen in Chart 2, Vietnam now ranks as one of the larger economies in the southeast region (known as ASEAN) as it nears the size of Malaysia and the Philippines. As well, the local stock markets in Vietnam now trade more in dollar value than the Philippines (see Chart 3). Similar to many emerging markets 25 years ago, Vietnam has low levels of urbanization (see Chart 4), presenting significant potential for its citizens to move up the income and capital ladder. 

Chart 2: ASEAN GDP Breakdown
Chart 2: ASEAN GDP Breakdown
Source: Credit Suisse.

Chart 3: Average daily traded value (US$ million, average of three months)
Chart 3: Average daily traded value (US$ million, average of three months)
Source: WFE and Credit Suisse research.

Chart 4: Frontier and emerging markets by ascending level of 2015 urbanization (%)
Chart 4: Frontier and emerging markets by ascending level of 2015 urbanization (%)
Source: Credit Suisse.

Fidelity Frontier Emerging Markets Fund has many holdings in Vietnamese companies, partly based on this positive structural outlook. As a result, I recently attended a large investor conference in Ho Chi Minh City (the old Saigon) to meet with management teams for updates on current business trends, as well as to meet new companies. I attended 25 group meetings, and overall, updates were very bullish, with Vietnam continuing to build economic momentum with an increasing gain of light manufacturing market share from China.

To support this growth, the government is accelerating its infrastructure build-out (see Chart 5). To fund the infrastructure spending, the government is privatizing formerly state-owned companies or selling off existing government stakes. Thus, the Vietnamese equity market has likely entered a “virtuous circle” – a cycle of higher stock prices, which leads to further privatizations, thus increasing trading liquidity, and in turn attracting more investors and potentially pushing stock prices higher. Chart 6 highlights this acceleration of asset sales and privatizations by the Vietnamese government. 

Chart 5: Vietnam infrastructure investment (US$ billion and % of GDP)
Chart 5; Vietnam infrastructure investment (US$ billion and % of GDP)
Source: Global Infrastructure Outlook.

Chart 6: M&A of Vietnamese companies (government sell-downs) by half-year
Chart 6: M&A of Vietnamese companies (government sell-downs) by half-year
Source: Bloomberg.

When I was at the conference, the Ho Chi Minh index was up 60% over the past year in U.S. dollar terms, valuations were elevated – and the conference was standing-room-only. The market has corrected sharply, which is providing long-term investors a much better entry point for good structural growth opportunities. As a result, I expect to continue to tilt the Fund toward “new China” opportunities, which I hope will generate attractive returns for fund shareholders.

 

Thanks for reading,

Adam Kutas


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