For anyone looking to invest in a developing country with strong long-term prospects, Vietnam is a good place to start. While broad market returns have disappointed in recent years, strong economic growth, an increase in foreign investment and a rising middle class should reward patient investors with a high risk tolerance.
Despite being a poor country with a population of more than 100m people, Vietnam has proved its mettle in handling the pandemic. The country’s suspension of non-essential activities lasted only 22 days, and it has managed to contain the coronavirus through timeliness, strict quarantine rules, widespread testing and intensive contact tracing. At the time of writing, the country had only recorded 34 deaths.
Coming out of the crisis, Michael Kokalari, chief economist at Vietnamese investment company VinaCapital, says the country has seen “a clear V-shaped recovery in domestic demand”. This is important as domestic spending is a key engine for growth in Vietnam, accounting for 68 per cent of gross domestic product (GDP) according to McKinsey.
Andy Ho, managing director of VinaCapital's Vietnam Opportunity Fund (VOF), says the country has been “amazingly resilient” in its crisis response. Although sectors such as tourism have been badly hit, others – such as industrials and technology – have seen a significant surge in demand.
Vietnam has grown as a manufacturing centre in recent years, thanks partly to Sino-US trade tensions and companies moving production out of China. Real estate, construction and related materials made up 38 per cent of VOF's assets at the end of July, and Mr Ho recently invested in one of Vietnam’s top industrial land developers to benefit from this trend. The boost in demand for industrial parks and construction materials has also been supported by the Vietnamese government. Mr Kokalari says they have spent $90bn on the sector so far this year – a 40 per cent increase on 2019.
Construction materials company Hoa Phat Group (HPG), which has been in the portfolio since 2007, is the trust’s biggest holding. Mr Ho says the company was worth $400m when they first invested, with a valuation now in excess of $6bn. The company has done well this year, with half of its revenue coming from infrastructure and a significant proportion from property development – something that has seen a rise in demand as interest rates have dropped.
While some areas of trade, such as garments, have been hit by the crisis, Mr Kokalari says Vietnam has seen “a massive widening" of its trade surplus, adding: "Last year the trade surplus was about 1 per cent of GDP, this year it is about 6 per cent.” He notes that exports of electronics and IT products to the US are up almost 20 per cent this year, as US consumers increasingly do not want to buy from China.
FPT Group, the largest IT service company in Vietnam and a top 10 holding, provides software development for companies in the US, Japan and Europe. Mr Ho says the company “develops the last mile of internet and telephony to your home", as well as helping companies build their customer relationship management systems. He adds that it "provides a lot of the tech that can help people work from more easily”.
| Share price total return (%) | ||||
| Fund / Index | 1yr | 3yr | 5yr | 10yr |
| VinaCapital Vietnam Opportunity Fund | -7.91 | 15.31 | 132.6 | 260.81 |
| MSCI Vietnam index | -15.25 | 22.87 | 57.06 | 42.93 |
| Source: FE, 04/09/2020 |
The rising middle class is an important trend for investors in Vietnam. “About 20 per cent of the country is emerging middle class by local standards,” Mr Ho says, adding that 10 years ago the presence of the middle class in Vietnam felt negligible.
To cater to this market, the fund has a stake in Phu Nhuan Jewelry, the largest jewellery company in Vietnam. Mr Ho notes that the company mainly sells gold and silver to people in their 20s and 30s and, while most of the business is domestic, it has recently partnered with both Disney and Swarovski.
Vietnam Opportunity Fund most notably differs from Vietnam Enterprise Investments (VEIL), the other Vietnam trust listed in London, by having substantial exposure to unlisted equities. The managers say this helps them access the best companies at an early stage, with closer links to management.
While 57 per cent of the trust is currently in listed equities, Mr Ho says 80 per cent of new investments are made when companies are private. They then either take the company public, or sell them to another strategic investor.
Vietnam has a rule that foreign shareholders can only own up to 49 per cent of listed companies unless the business specially requests that this cap is increased, something Mr Ho says has only happened for 50 out of a total of 1,500 listed companies. Mr Ho says good companies tend to reach the 49 per cent threshold quite quickly. Because there is no foreign share ownership limit for private companies, the trust's approach of buying companies privately and bringing them to market can therefore boost returns in the long run.
While the average holding period in the fund is about four to five years, some names have been in the portfolio for much longer. Vinamilk, the largest dairy corporation in Vietnam, has been in the fund since 2005, and remains one of its top 10 holdings.
