Vietnam Enterprise Investments 25 October 2023

Vietnam is one of the countries benefitting the most from the decoupling of US/China trade, all while it is continuing its long-term liberalisation of its economy and markets, undergoing a multi-year boom akin to that China experienced in the early 2000s. Vietnam Enterprise Investments (VEIL) sets out to benefit from these trends, using the deep knowledge and connections of a locally-based management team which has been present in the country since before its stock market launched. In fact, Dragon Capital, the management company, was the first overseas investor present in the country and is the largest by AUM.

VEIL has delivered strong long-term returns in both absolute and relative terms (see Performance). Returns in Vietnam tend to be volatile, and 2022 was a tough year, but 2023 has seen a decent recovery in the market already. The managers tell us they are growing increasingly bullish and have increased their weighting to cyclical, economically sensitive companies in anticipation of strong earnings growth over the next few quarters.

In particular, they cite government stimulus plans and new trade deals with the US as reasons for optimism, while the central bank has already cut rates substantially. The recent upgrade in diplomatic relations with the US to Vietnam’s highest level of Comprehensive Strategic Partnership (CSP) could be particularly significant over the long run (see Portfolio section), and has led to a rally in a number of sectors linked to technology and manufacturing, benefitting VEIL.

VEIL trades on a wide Discount of 19.7% at the time of writing, compared to a five-year average of 13.7%.

Where to invest for long-term capital growth? In our view, Vietnam has to be top of the list of candidates. There are a number of secular growth themes which have good visibility, having delivered excellent returns in other emerging markets – most notably China. Chief is the transition from a command economy to a more liberalised economy, with the rapid economic development that entails. Additionally, Vietnam’s labour costs are cheap enough for it to serve as a key site for manufacturing high-end electronics, with a good education system being boosted by foreign investment (one element of the recent CSP signed with the US). The growth of a new middle class is at a very early stage and provides obvious earnings potential for companies selling to it – notably financial services companies which have delivered exceptional returns in India as it travels along the same path a few years ahead.

All this growth potential is accompanied by risks. Vietnam is well-placed to trade with the US and China, and must maintain a strong relationship with both of these two superpowers. Domestic politics have witnessed a recent anti-corruption drive. Vietnamese equities are becoming more sensitive to global trade flows and risk appetite. All this has to be considered and makes us argue a position has to be for the long term. In our view, the 20% discount is excessive and unlikely to prove structural. We would expect this to narrow whenever global risk appetite increases, perhaps when developed world rates fall and investors look for returns in riskier assets. We note the market is currently over 25% off its all-time highs that were set last year, with earnings growth of 18–25% currently expected next year. Dragon Capital forecasts GDP growth of 6.0–6.5% in 2024.