Frontier and emerging markets (Vietnam)

Dylan Waller

Thematic (Sector/Industry)

Vietnam's economy exceeded growth expectations and is well positioned for favorable performance moving forward despite rising global tensions.  The stock market is now more accurately priced following the pullback experienced since Q1 2018, which now allows the market to move in line with earnings growth.  Vietnam's economic characteristics are superior to that of many frontier and emerging markets and the stock market characteristics are also more mature and favorable as compared to other frontier markets and even some smaller markets.  Vietnam continues to be my top pick for 2019, closely followed by other markets such as Egypt and Uzbekistan. Vietnam's GDP growth was above 7% during 2018, which was driven by strong growth in the manufacturing, services and construction sectors.  FDI inflows rose by 9% during 2018 despite the plunge in global FDI. Vietnam's export narrative continues to shine on the back of new free trade agreements coming on board and the continued sophistications of its export structure.  Vietnam has also been successful in diversifying its export markets, though future growth does largely hinge upon favorable performance in the US and China.
The services sector has been rising to become an increasingly larger contributor to growth, and its contribution to GDP still lags behind other emerging Asian markets.  The average growth rate of the services sector was 6.8% during 2010-2017, while the average GDP growth rate during this time period was only 6%. Vietnam's tourism industry has also been growing rapidly, though arrivals are still less than half of those of Thailand. The appeal of Vietnam's tourism industry will be a key contributor to growth, as tourism revenue was equivalent to around 11% of GDP as of 2018.
Inflation was below the SBV’s target and the SBV has also stepped in to control excessive credit growth.  This was an appropriate step given that Vietnam's credit to GDP levels are well above some of its peers.
The VND has remained very resilient this year despite global tensions that hit a large number of currencies during this year. Vietnam’s currency has outperformed a large number of regional peers largely due to strong FDI disbursement, suitable FX reserves, consistent CA surplus and its trade surplus.  This will allow the VND to continue to outperform other frontier and emerging market currencies.
This sophistication of Vietnam's exports favorably contrasts other markets such as Bangladesh and Sri Lanka, which suffer from weaker export diversification and a higher dependency on textile exports, an area in which Vietnam also shines.  Vietnam is also well positioned to benefit from the US China trade war and has already displayed positive signals this year.
Vietnam is several years away from an emerging market upgrade, as it is still behind on key issues such as foreign ownership limitations and most notably information disclosure in English.  Although the progress of Vietnam’s emerging market upgrade from MSCI has been disappointing, it is also imperative to note the short term benefits the market can experience as it rises in MSCI Frontier Markets.
The favorable macro characteristics and superior liquidity of the market do warrant a premium to other frontier markets in the coming years, though the greatest thing ahead for the market is the long term PE expansion that will occur on the back of an MSCI emerging market upgrade.  The pullback in the VN Index now allows the market to move in line with earnings growth, while additional PE expansion will only take place in several years when the market is upgraded.

Vietnam's economy exceeded growth expectations and is well positioned for favorable performance moving forward despite rising global tensions.  The stock market is now more accurately priced following the pullback experienced since Q1 2018, which now allows the market to move in line with earnings growth.  Vietnam's economic characteristics are superior to that of many frontier and emerging markets and the stock market characteristics are also more mature and favorable as compared to other frontier markets and even some smaller markets.  Vietnam continues to be my top pick for 2019, closely followed by other markets such as Egypt and Uzbekistan.  Vietnam's GDP growth was above 7% during 2018, which was driven by strong growth in the manufacturing, services and construction sectors.  FDI inflows rose by 9% during 2018 despite the plunge in global FDI.  Vietnam's export narrative continues to shine on the back of new free trade agreements coming on board and the continued sophistications of its export structure.  Vietnam has also been successful in diversifying its export markets, though future growth does largely hinge upon favorable performance in the US and China.
The services sector has been rising to become an increasingly larger contributor to growth, and its contribution to GDP still lags behind other emerging Asian markets.  The average growth rate of the services sector was 6.8% during 2010-2017, while the average GDP growth rate during this time period was only 6%.  Vietnam's tourism industry has also been growing rapidly, though arrivals are still less than half of those of Thailand. The appeal of Vietnam's tourism industry will be a key contributor to growth, as tourism revenue was equivalent to around 11% of GDP as of 2018.
Inflation was below the SBV’s target and the SBV has also stepped in to control excessive credit growth.  This was an appropriate step given that Vietnam's credit to GDP levels are well above some of its peers.
The VND has remained very resilient this year despite global tensions that hit a large number of currencies during this year. Vietnam’s currency has outperformed a large number of regional peers largely due to strong FDI disbursement, suitable FX reserves, consistent CA surplus and its trade surplus.  This will allow the VND to continue to outperform other frontier and emerging market currencies.
This sophistication of Vietnam's exports favorably contrasts other markets such as Bangladesh and Sri Lanka, which suffer from weaker export diversification and a higher dependency on textile exports, an area in which Vietnam also shines.  Vietnam is also well positioned to benefit from the US China trade war and has already displayed positive signals this year.
Vietnam is several years away from an emerging market upgrade, as it is still behind on key issues such as foreign ownership limitations and most notably information disclosure in English.  Although the progress of Vietnam’s emerging market upgrade from MSCI has been disappointing, it is also imperative to note the short term benefits the market can experience as it rises in MSCI Frontier Markets.
The favorable macro characteristics and superior liquidity of the market do warrant a premium to other frontier markets in the coming years, though the greatest thing ahead for the market is the long term PE expansion that will occur on the back of an MSCI emerging market upgrade.  The pullback in the VN Index now allows the market to move in line with earnings growth, while additional PE expansion will only take place in several years when the market is upgraded. 

Airports Corporation Of Viet Nam (ACV VN)

Vietnam's Economy Trounces Other Frontier Markets: 2018 Pullback Provides Solid Entry Point