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Letter from Vietnam: Heydays of doi moi

Vietnam is enjoying its day in the sun. The economy is healthy, with growth at its highest in a decade. Core inflation remains low and its external balances are improving.

Manufacturing has been the star under the doi moi policy that started 32 years ago. Resembling parts of Russia’s perestroika and China’s economic liberalization, Vietnam is shifting from a centrally-planned economy to a market-oriented one while keeping its political structure largely intact.

It has been integrating itself more deeply with the global economy and is growing in importance in major international supply chains. Made-in-Vietnam smartphones, textiles and electronics are increasingly making their way to the U.S., Europe, China and the rest of Asia.

And change is evident everywhere, most significantly, the stock market.

Demographics also played its part. Vietnam has a domestic market of $95 million, with half its population under the age of 35 and a large workforce upbeat about their future. Incomes are rising, the growing middle class is spending and a hungry consumer market awaits Vietnamese and foreign companies.

At a pivotal juncture

The clutter of motorbikes, hoardings and construction sites was all around me during a recent visit to Ho Chi Minh City, my first to Vietnam. And I experienced the typical sight and sound of daily life - severe traffic congestion. Currently, a driver can take nearly two hours to tame a 12-kilometer gridlock in the city.

But I was unshaken by the bumpy roads in Vietnam. Instead, I’m seeing a virtuous cycle take root. As long as the government continues to open up markets and industries, maximizing market-based financing, including “equitization,” or privatization in local parlance, this will engender interest from foreign investors.

And change is evident everywhere, most significantly, the stock market. Nearly 20 years ago, there were only two listed companies, with a market capitalization of 986 billion dong ($43 million in current value). Now, the domestic securities market has reached $191 billion in total value, equivalent to 95% of 2016’s gross domestic product (GDP).

Alongside strengthening macroeconomic fundamentals, the sizzling market has also benefited from the “equitization” process. Last year, foreign investors bought $1.5 billion of Vietnamese shares.

Admittedly, for those looking to invest, the market isn’t as cheap as before. However, when stacked against Vietnam’s attractive longer-term economic prospects and earnings potential of companies, valuations still appear to have plenty of room for upside.

A pioneering moment

Vietnam’s government has confirmed its intention to continue promoting the private economy while recognizing the importance of private companies to economic development.

In our view, regulatory trends are also moving in the right direction, with gradual relaxation of foreign ownership rules for companies and the launch of a new securities law, given the government’s overarching aim for Vietnam to reach emerging market status by 2021. Amid the favorable conditions, formal retail is relatively undeveloped.

The hungry consumer

Urban Vietnam is emerging into a fast-growing society. Domestic demand is accelerating for products spanning real estate, food and beverage and telecommunications services.

Food preferences of the Vietnamese are evolving as disposable incomes rise. Vietnam’s food and beverage sector is forecast to grow 16% through to 2019.1 What is significant in this growth is the rise in consumer sophistication, alongside the demand for healthier products.

A bright spot for this trend is the dairy industry. On average, a Vietnamese consumes 15 kilograms (kg) of dairy products a year, compared with neighboring Thailand (34kg) and China (26kg).2

Consumer dynamism

With retail sales rising 10.9% to 2017’s record $130 billion,3 Vietnam’s middle class is unleashing its spending power. We see room for growth given the low penetration of organized retail.

Vietnam makes one of every 10 smartphones produced across the world.4 Domestically, there are nearly 120 million mobile phone subscribers.5 The segment is reporting good growth.

Overall, investing in any emerging market is not without its risks. For now, we’re riding on the wave of Vietnam’s new economic boom.

1Vietnam sees flourishing food and beverage industry, Vietnamnet Bridge, April 16, 2018.

2Vinamilk’s corporate presentation, Q4 2017.

3Vietnam retail sales hit record $129 billion, InsideRetail Asia, January 11, 2018.

4Vietnam’s manufacturing miracle: lessons for developing countries, Brookings Institution, April 17, 2018.

5Vietnam phone exports to China skyrockets in Q1, Xinhua, April 17, 2018.

Important Information

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks may be enhanced in emerging markets countries.

Image credit: Michele Falzone / Getty Images

ID: US-070618-66549-1