A smartphone production line at the VinSmart factory in Hanoi.
Yen Duong/Bloomberg
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Vietnam is a rapidly emerging economic power. So, why isn’t it an emerging market?
The index gatekeepers at MSCI are sticking with the country’s “frontier market” status for the foreseeable future, preventing many emerging markets funds from investing there—and for good reason.
President Joe Biden singled out Hanoi for an Asian state visit this week, mostly to cement a 100-million-strong strategic counterweight to neighboring China. A brace of tech executives accompanied the president to explore further investment.
No wonder. Vietnam is visibly moving up the electronics value ladder as manufacturers seek alternatives to China.
Apple
’s
(ticker: AAPL) suppliers are reportedly upgrading local production from simpler accessories to OLED screens. Rival
Samsung Electronics
(005930.Korea), which already produces half of its smartphones in Vietnam, recently rolled out a $220 million research-and-development center in Hanoi.
Vietnam is nibbling at China’s supremacy in the semiconductor supply chain with new investments by packaging/testing specialist
Amkor Technology
(AMKR) and data infrastructure provider
Marvell Technology
(MRVL), says Dylan Patel, chief analyst at SemiAnalysis.
Vietnam’s economy will grow nearly 5% this year even as export markets contract, then rebound to 6% by 2025, according to the World Bank. The case for Vietnamese stocks is a lot shakier. There still aren’t many to choose from, 35 years after Communist leaders launched market reform: About 50 companies have a $1 billion-plus market cap, says John Paul Lech, a portfolio manager at Matthews Asia.
“The very exciting top-down story suffers from market breadth and access in the bottom-up perspective,” he says.
Multinationals dominate the burgeoning export sector, accounting for three-quarters of Vietnam’s foreign sales. That leaves a domestic bourse overly exposed to banks and real estate developers (half of the market cap), which in turn are exposed to financial and administrative growing pains.
The
VanEck Vietnam
exchange-traded fund (VNM) crashed by nearly half last year as domestic uproar compounded the global markets slump. The government clamped down clumsily on a frothy real estate bond market and threw a number of tycoons in jail on vague corruption charges. Both moves spooked the key financial sector.
The market has regained a third of its lost ground this year as Hanoi slowed down the purge and bolstered banks with liquidity. “Vietnam’s Communist Party has shown it isn’t marching down the same road as China’s,” says Jonathan Binder, chief investment officer at frontier markets specialist Consilium Investment Management. “They handled the property sector situation deftly.” Neither is Hanoi marching toward emerging market status, however. The main roadblock is limits on foreign ownership, set at 30% for banks and 49% for other listed companies. That’s a deal killer for MSCI.
Thailand offers precedent for a workaround with nonvoting depositary receipts that don’t count toward the foreign ownership cap, says Bill Stoops, chief investment officer at Hanoi-based
Dragon Capital
.
Vietnam’s leaders are still thinking about it. “Rerating of the market to much higher Southeast Asian valuations seems unlikely until we go into the MSCI-EM index,” he says.
But a few stocks stand out. Information-technology outsourcer
FPT
(FPT.Vietnam), the country’s leading tech name, is an investor favorite. “FPT’s engineers are just as good as India’s or China’s at half the price,” Stoops says. He’s also bullish on steel maker
Hoa Phat Group
(HPG.Vietnam), given the likely acceleration of infrastructure development, and diversified retailer
Mobile World Investment
(MWG.Vietnam).
China’s mix of Communism and capitalism worked brilliantly, until (maybe) it didn’t. We’ll see if Vietnam can do better.