Vietnam is an intriguing market undergoing significant change, and its stock market has been a strong performer. It is one of the largest positions within our T Rowe Price Frontier Markets strategy, and we have been overweight since mid-2014.
We recently attended Vietnam’s largest investor conference, which offered us the chance to meet a large number of companies, industry experts and also representatives from both the World Bank and the Asian Development Bank.
Three years ago, no one was interested internally or externally in Vietnam, but this time the conference was overwhelmed, with nearly 200 foreign investors and about 200 local investors. Vietnam is firmly back on the map and everyone was talking about it as the Asian play. However, to me, this does raise an amber flag.
We are now in the fifth year of broad economic stability and the future remains bright, with the government targeting 6.7 per cent growth for 2017. The levels of foreign direct investment also continue to rise year-on-year, with electronics attracting the lion’s share as Vietnam becomes a manufacturing hub. What is particularly interesting is that 70 per cent of exports are now from foreign-owned companies within Vietnam. Samsung Electronics on its own makes up 30 per cent of this total.
Inflation is ticking up, but is still below 5 per cent. Historically, the indicator of any potential bubble bursting has been inflation, so we will continue to keep a close eye on any surge higher. And there are also vulnerabilities. The fiscal deficit is 6 per cent of GDP, while debt-to-GDP stands at 65 per cent, which is the government’s stated maximum, so there is a concerted effort to rein it in.
The demise of the Trans-Pacific Partnership was unfortunate, but has had no real impact so far. It could have a longer-term impact as Vietnam’s growth model is more dependent on access to the US and other developed markets than most frontier markets. However, there are already talks of bilateral trade deals being organised with countries like the US, so we are not too concerned.
One of the reasons we went overweight in mid-2014 was that there were clear signs the property market bust had bottomed and there were signs of stabilisation. What is interesting now is that, almost three years later, the top end of the property market is now showing signs of oversupply.
However, there remains a very strong demographic tailwind, with urbanisation driving around 1m people to the cities each year. The median age of the population is under 31, with 45 per cent of the population below the age of 30. This is keeping very strong demand at the low to middle end of the property market.
The top end will be oversupplied, but investors appear relatively sanguine at the moment. However, with higher mortgage rates of between 7 and 10 per cent, combined with relatively low rental yields of around 6 per cent, it could at some point put a strain on the system.
The banking system has been a worry, but on this trip I was reassured the problems of the past are being dealt with. We are now dealing with a much cleaner and more honest system. One of the banks we met with told us that non-performing loans (NPLs) were probably around 17 per cent at the peak. Three years ago they were telling us it was only 5 per cent.
The stock market has rewarded those banks that have been the most transparent by admitting NPLs early. Many of these now have NPLs around 2 per cent – a much improved situation. Some of the others are still ironing out problems, so we are staying clear.
Encouragingly for profits, loan growth accelerated to around 18 per cent last year and it is expected to be around the same level this year. Where there is a change is where the money is being directed. Historically, the vast majority had gone toward state-owned enterprises, but now more of the money is being directed to retail and SMEs to take advantage of an underpenetrated consumer.
The consumer is offering up more and more opportunities. The Vietnamese consumer is currently in quite a good spot – with rising GDP per capita, rising wages and greater access to credit. This is helping to boost the services sector, where we continue to see strong growth.
Up until now, we have played and benefited from the broad economy – banks, property, and construction. We intend to continue this, but we may tilt a little bit more toward the consumer. We have unearthed a few more companies in this space, which may be a little more small-cap but could offer great long-term opportunity.
Overall, it was a positive trip, but the risks are definitely rising – with respect to the economic cycle and to market positioning, particularly by foreign funds. Though, for now, there remains enough momentum in the economy and by certain individual companies for us to remain fully invested in Vietnam.