Asset managers are always on the lookout for under-the-radar investments and some comb the globe to find them. As a result, capital is increasingly allocated to distant regions such as Eastern Europe, Latin America and West Africa. One the more promising destinations fund managers are targeting for investment is a place you might not expect-Vietnam.
The tiny Southeast Asian country is thriving amid relatively new independence. The country was controlled by China for over one thousand years, and has had other occupiers including Japan and France. Of course, there’s our own troubled history with the country. It’s difficult for many fund managers to imagine Vietnam as an upcoming economic force, while others can see potential.
But there are reasons to be optimistic; the economy is strong and diversified and the population is young, providing low-cost labor. And there are several free trade agreements they are enjoying, including the Trans-Pacific Partnership, TPP as well as free trade agreements with the European Union.
While still communist, Vietnam enjoys a free market and is a member of the World Trade Organization.
As a result, there has been strong foreign direct investment (FDI) into Vietnam over the last few years. In 2015, Vietnam saw a 12.5% increase in FDI, reaching almost $23 billion.1 Consequently, the country’s stock market has seen solid gains, increasing almost 17% year to date.2
With abundant natural resources, Vietnam is one of the largest exporters of rice in the world. It also exports oil to the United States. Currently, Vietnam is enjoying two booming industries, manufacturing and tourism.
With its low-cost labor, stable political climate and young population, Vietnam is the new “it” place for outsourcing by foreign companies, the United States especially. The manufacturing and processing sectors account for over 2/3 of FDI in Vietnam.3
Samsung Electronics is the largest foreign investor in Vietnam but there are other notables, including auto makers Ford Motor Company and Toyota Motors.4 Intel also has a $1 billion testing and assembly plant in Ho Chi Minh City.5
Vietnam is becoming more attractive than even China to many foreign corporations. This is because China’s labor costs have increased while the country maintains a difficult reputation of doing business with. Other Asian economies have their own issues. Japan is struggling with older demographics and a decades-long battle with deflation. Malaysia is in the midst of turmoil stemming from its 1MDB corruption scandal of 2015.
Vietnam is a naturally beautiful place. Tourists come from around the world to experience the beauty of Halong Bay and the bustle of Ho Chi Minh City. And the cooling of tensions between Vietnam and the United States is a major tailwind helping the country’s economic profit. President Obama recently toured the country and dined with Anthony Bourdain at a local Bun Cha eatery. Enjoying the local ‘street food’ in Vietnam is considered a must when visiting. But keep in mind, you may need to have an adventurous spirit as snakes, crocodiles, bugs and frogs are commonly spotted on restaurant plates.6
Vietnam is still classified as a frontier market but is hoping to get ‘promoted’ to emerging markets status. Frontier markets are developing countries that have an investable stock market but haven’t quite made it to emerging market status yet. Emerging markets include heavyweights such as Brazil, China, India and Russia Emerging market status is followed by developed market status enjoyed by the United States, Switzerland, Germany, Japan, etc.
Standing in Vietnam’s way is the MSCI- that organization that decides on membership into their Emerging Markets Index (and at what weightings).
Of course, all developing countries would love to move into the emerging market classification because it will surely swell the size of their stock markets once added to the MSCI’s Index. Other frontier markets such as Nigeria, Kuwait and Argentina are battling with Vietnam for inclusion. There are several funds that invest directly in that MSCI emerging market index, so inclusion mean inflows of capital. While Vietnam is currently included in the MSCI’s frontier market index, the market capitalization of the emerging market index is 30 times larger in size.7
Getting into the Emerging Markets Index
The selection process into the emerging markets index is a bit tricky and many thought Vietnam would have been included by now. Perhaps the MSCI is worried that the outsourcing trend will simply move onto the next cheapest area of the world, perhaps Africa, returning Vietnam to its former condition. Outsourcing brings wonderful economic benefits to a country. It improves infrastructure and raises the standard of living. Unfortunately, once the workforce begins to enjoy wage increases, foreign companies may move onto even lower-cost labor countries.
Another concern is that Vietnam’s workforce, while young, is poorly educated. Those that go to school receive just 33 weeks of education per year and just 1 in 5 students receive the normal 5-6 hours in the classroom per school day.8 Finally, a survey done by Vietnam’s own Ministry of Labour concurred, noting that just 40% of their workforce had training of any sort.9
Even without inclusion in the emerging markets index, the Vietnamese stock index has held up much better than many other members of Asia.
Foreign investors increased their holdings in Vietnamese shares by a net $100 million in 2015, the 10th straight year of inflows.10 The one year return for Vietnam’s Ho Chi Minh index is nearly 22% compared to China’s Shanghai stock exchange (down 1.61% year over year) and Japan’s Nikkei 225 (down 5.7% year over year).11,12 So inclusion doesn’t guarantee better performance, just more access to capital.
Jobs in Vietnam
There is a growing demand for jobs in Vietnam, especially in finance and banking. Many institutional investors have a foothold in Vietnam, seeking outsized, uncorrelated returns. There are also positions for accountants and internal auditors for many of the manufacturing companies that call Vietnam home.
Private equity firms are seen throughout Vietnam and recent search for Vietnamese finance jobs turned up openings at numerous private equity firms. One position, located in Ho Chi Minh City, cites responsibilities including and managing Treasury operations (cash management) “to optimize return on investments.”13 The requirements are as a bachelor’s degree in finance or accounting and a Masters in Finance degree or CPA is preferable.
Finally, compliance and ethical issues are often challenging in more locations around the world. As U.S. firms set up operations overseas, the need for risk managers on the ground grows. As we’ve reported on in numerous articles, it’s often an overseas subsidiary of a major U.S. or Western firm that gets into trouble, leaving the parent company to clean up the mess, in the form of a hefty fine.