One of the things you least want to hear when travelling is how much more interesting or beautiful a country was ten or twenty years ago. I heard this a lot in the 1980s when I was visiting south-east Asia and I tried to avoid the temptation to be that travel bore when passing through Bangkok last week with my wife who was on a first trip to the region.
The more interesting question for an investor is what a country will look like in a few years’ time. This was the relevance to me of Bangkok this time round because it felt like a template for the country we had just spent a couple of weeks travelling around – Vietnam. If you want a vision of Ho Chi Minh City in the future, then the Thai capital is not a bad starting point.
I’d be quite surprised if it takes anything like ten or twenty years for Vietnam to catch up. Nearly half a century on from the end of the American War, the country has more going for it than any emerging market in Asia or anywhere else for that matter. History has not been kind to Vietnam, but the future looks bright for what many investors see as the developing world’s next big thing.
The fundamentals are certainly in place. Vietnam is a country of 95 million people, half of whom are of working age, two thirds younger than 35. They are well-educated and ambitious – as a precocious eleven-year old girl in Hanoi explained to me: ‘if I speak good English, I can earn three times as much’.
GDP is currently growing at 7% a year and expected to continue doing so for the foreseeable future. In large part that growth is being driven by heavy foreign direct investment, notably from Japan and South Korea. Samsung already makes most of its smartphones in the country. Intel’s second-biggest operation outside the US is there. The shoes and many of the clothes you are wearing are very likely Made in Vietnam.
The main attraction is, unsurprisingly, cost. Wages in Vietnam are around a third of those in China and the workforce continues to grow, with a million new workers every year. New entrants to the labour force will outpace retirees until the middle of the next decade at least so the country is a long way from the demographic squeeze that’s constraining many developed countries and even China.
Geography is also on Vietnam’s side. Located on China’s southern flank, it has access to that country’s massive consumer market. With a thousand-mile coastline, too, it is well-endowed with deep-water ports. Its infrastructure is relatively poor, as you realise if you try to take even a seemingly short rail trip, but it is improving fast. The number of flights in 2018 exceeded 50 million, a 270% rise compared with seven years earlier. Smartphone penetration is up to 90% or so. Internet access has doubled in six years.
One of the biggest attractions of the country to overseas investors is its stable politics, a by-product of Vietnam’s Chinese-style blend of apparently free-wheeling capitalism but still tight single-party control. Debt levels are relatively low, inflation is under control, funding costs manageable and the currency stable.
The domestic consumption story is very similar to China’s of a decade or two ago. During our stay in Hanoi, we visited a young family where the parents enjoyed good jobs with a local property developer and a Japanese engineering company. They lived in a small flat with their two children, had a TV, fridge, washing machine and scooter but few other obvious signs of conspicuous consumption. Like most people in this nascent middle class, they had never left the country, or even travelled much within it. The basic consumption story may be played out in China, but it has a long way to go in its southern neighbour.
Urbanisation is another key driver of consumption growth. With less than 40pc living in cities, Vietnam is well behind regional neighbours such as Thailand, Indonesia and China, all with urbanisation rates above 50pc. Nowhere is the move from the countryside happening faster than in Vietnam, however.
A big unknown is the extent to which Vietnam will be a beneficiary of the ongoing trade war between the US and China. On the face of it, the country is an obvious replacement for companies looking to reduce their exposure to Asia’s biggest economy. In the first half of 2019 exports from emerging Asia to the US rose by 10pc despite a 12pc reduction from China. Vietnam stood out, with a 33pc increase, including a notable rise in its share of electronics exports.
However, it is worth remembering that the costs of shifting production south from China are not insignificant. With the US representing less than 20pc of total Chinese exports, many companies will prefer to ride out the storm and wait for better times. And Vietnam could end up in Donald Trump’s sights itself. It already has the 4th largest trade surplus with America at around US $50bn.
For investors, a key development would be the promotion of Vietnam from its current Frontier Market status to fully-fledged Emerging Market. Indeed, were it not for issues with the management of foreign ownership limits, the country would already have made the cut and joined the bigger league. With a market valued at US $200bn, it is already more significant than many emerging-market-classified countries. The current best guess is that it will make MSCI’s watchlist in 2021 and be promoted the following year.
I would have loved to have seen Vietnam when I travelled in the region all those years ago but I’m certainly looking forward to seeing it how it develops over the next few years. It would be surprising if investors were not well-rewarded over that period.
Published by Tom Stevenson, investment director at Fidelity International