Vietnam’s economy is burning. Why its stocks are not.

font size

Vietnam is a rapidly emerging economic power. So why is it not considered an emerging market?

MSCI’s index guards are clinging to the country’s “frontier market” status for the foreseeable future, preventing many emerging market funds from investing there – and for good reason.

President Joe Biden singled out Hanoi for an Asian country visit this week, mostly to bolster neighboring China’s 100 million-strong strategic weight. The president was accompanied by a group of technology executives to explore further investment.

no wonder. It is clear that Vietnam is moving up the electronics value ladder as manufacturers look for alternatives to China.

apple
‘s

(Symbol: AAPL) Suppliers are said to be upgrading local production from simpler accessories to OLED displays. competition

Samsung Electronics

(005930.Korea), which already produces half of its smartphones in Vietnam, recently opened a $220 million R&D center in Hanoi.

Vietnam seeks to overcome China’s supremacy in semiconductor supply chain with new investments through packaging/testing specialist

Amcor Technology

(AMKR) and data infrastructure provider

Marvell technology

(MRVL), says Dylan Patel, senior analyst at SemiAnalogy.

Vietnam’s economy is expected to grow by about 5% this year even as export markets contract, then rebound to 6% by 2025, according to the World Bank. As for Vietnamese stocks, they are much more shaky. There isn’t much to choose from, 35 years after communist leaders launched market reforms: there are about 50 companies with a market capitalization of more than $1 billion, says John Paul Leach, portfolio manager at Matthews Asia.

“The very interesting top-down story suffers from market breadth and access from a bottom-up perspective,” he says.

The thriving export sector is dominated by multinational companies, accounting for three-quarters of Vietnam’s foreign sales. This leaves the local stock market overly exposed to banks and real estate developers (half the market capitalization), which in turn are exposed to growing financial and managerial pain.

the

Van Eyck Vietnam
Exchange-traded funds (VNMs) have collapsed by nearly half in the past year, as domestic hype exacerbates a decline in global markets. The government has launched a clumsy crackdown on the sluggish mortgage market, throwing a number of tycoons in prison on vague corruption charges. Both moves spooked the mainstream financial sector.

The market has regained a third of what it lost this year as Hanoi slows its disinfection campaign and supports banks with liquidity. “The Communist Party in Vietnam has shown that it is not on the same path as the Chinese party,” says Jonathan Binder, chief investment officer at Concilium, an investment manager specializing in frontier markets. “They handled the real estate sector situation brilliantly.” However, Hanoi is not moving towards emerging market status. The main obstacle is restrictions on foreign ownership, which is set at 30% for banks and 49% for other listed companies. This is a killer deal for MSCI.

Thailand sets a precedent for a workaround through non-voting depositary receipts that do not count toward the foreign ownership cap, says Bill Stoops, chief investment officer at the Hanoi-based firm.

Dragon Capital
.

Vietnam’s leaders are still thinking about it. “It seems unlikely that the market will re-rate to much higher valuations in Southeast Asia until we get into the MSCI-EM index,” he says.

But a few stocks stand out. Information technology outsourcing

FPT

(FPT.Vietnam), the country’s leading technology name, is a favorite among investors. “FPT engineers are just as good as India or China engineers at half the price,” says Stoops. He is also optimistic about the steel maker

Hua Fat Group

(HPG.Vietnam), given the potential acceleration in infrastructure development and retail diversification

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.