When considering an allocation to emerging markets one should also contemplate an allocation to the Association of Southeast Asian Nations (Asean) bloc. The dominant five economies in the bloc are Indonesia, Malaysia, Singapore, Thailand and the Philippines. One nation that is part of ‘the rest’ but worth a second glance is Vietnam.
Last year, the Vietnamese authorities relaxed the rules on foreign ownership of its companies, which led to a surge of interest in the market, helping take shares to near-term highs. Inevitably, limits upon foreign ownership of domestic assets has historically been an issue preventing global investors obtaining meaningful positions, but the rules have continued to be more accommodative in recent years.
An example of this is the recent announcement that the rule capping foreign ownership of banks at 30 per cent is to be lifted. The government initiative is aimed at elevating the economy from a frontier to an emerging market, and alleviate some of the pressure on the state to continue supporting the banks. This promotion to emerging market status would then put the country on the map for a much wider audience, further increasing inward investment. The last two countries to win promotion, the United Arab Emirates and Qatar in June 2013, witnessed their markets rise materially over the following 12 months.
Despite the recent rally in the Vietnamese market, its price-to-earnings ratio is not materially expensive at 16 times. To offer up some kind of context, the FTSE 100 currently trades close to 28 times. Vietnam is also aided by a favourable demographics profile, with around 60 per cent of the population being working age, and half its 94 million population under 30 years of age. The region’s low real wages allow for a competitive advantage over other markets, too. This powerful combination of demographics and competitiveness will offer material support to the domestic consumption story and, subsequently, the growth appeal of the economy.
Data for the third quarter of 2016 suggests that real GDP growth is running at 6.4 per cent year on year. The economy also continues to play catch-up with some if its neighbours, offering justifiable expectation that there is plenty of growth potential left to play for.
The story of Chinese ‘urbanisation’ is well known, yet Vietnam remains under the radar despite being in a similar position, with 70 per cent of people living in rural areas. This will accelerate and underpin growth potential in Vietnam. As with many emerging markets, the difficulty sometimes lies in converting GDP growth into shareholder returns, and improvements in corporate governance, ownership and regulation need to continue apace.
As is often the case with investing in emerging markets, it’s rarely a smooth ride. However, given a long-term investment horizon and dry powder at hand to ‘buy the dips’, it is easy to see why Vietnam is getting more coverage.
James Sullivan is director and senior fund manager at Coram Asset Management
