Vietnam’s “Doi Moi” and integration process from 1986 to present

Vietnam’s “Doi Moi” process, initiated in 1986, represents a transformative era in the nation’s economic history. The term “Doi Moi,” which translates to  ”renovation” or “innovation”, has become synonymous with Vietnam’s remarkable journey from a centrally planned economy to a socialism-oriented market economy.

The achievement after nearly 4 decades of innovation is that the annual GDP growth rate is continuously maintained at a high level. The old standard poverty rate decreased from 58.1% (1993) to 5.8% (2016) and based on the multidimensional poverty standard (applied since 2016) decreased from 9.2% (2016) to 4.3% (2022). Vietnam joined the group of middle-income countries in 2010 and is one of the most successful countries in implementing the United Nations Millennium Development Goals. Since then, Vietnam has become an inspirational model for many developing countries in economic reform and integration.

Vietnam’s GDP growth compared to Thailand, Indonesia and South Korea (1998-2022, source: World Bank)

GNI per capita of Vietnam (1998-2021, source: World Bank)

Efforts to integrate with the global economy

For nearly 20 years, Vietnam has actively negotiated and signed a variety of bilateral and multilateral trade agreements. The government also makes efforts to establish and upgrade diplomatic and economic relations with many countries. Among them, there are countries that are currently important trade partners of Vietnam such as the United States, China, Japan, Korea, the European Union, Russia, and Southeast Asian countries. These moves have removed many trade barriers, thereby making import and export of goods easier as well as creating an attractive investment environment for foreign investors. It’s a testament to the government’s commitment to embracing the opportunities that a rapidly changing global economy presents.

Vietnam’s integration with world trade over the past 30 years

Vietnam’s successful integration efforts have not only resulted in trade surpluses since 2012 but have also propelled the country into the group of the twenty largest exporting nations globally.

Vietnam’s Balance of Payments (1998-2022, source: IMF)

Furthermore, the consistent growth of Vietnam’s foreign reserves has provided a crucial buffer for ensuring the stability of exchange rates and interest rates – factors of paramount importance to foreign investors seeking opportunities in the country.

Vietnam’s foreign exchange reserves (1998-2023, source: World Bank)

USD/VND exchange rate (2003-2023, source: Investing.com)

Equitization of SOEs

Since 1992, Vietnam has undertaken a comprehensive privatization effort with a unique approach compared to other transition economies. Referred to as ‘equitization,’ this process means privatization while retaining a significant level of state ownership and allocating a substantial portion of shares to insiders. The equitization strategy has effectively resulted in reduced government intervention in business operations, paving the way for a more market-driven economy.

Moreover, equitized enterprises demonstrating efficient operations are subsequently listed on the stock exchange. These listings not only reflect their success but also present attractive investment opportunities for both domestic and international investors.

Vietnam’s commitment to economic liberalization extends to crucial commodity markets, including food, fuel, and electricity. These markets now operate with increased freedom, directly connecting to the global market. This shift has significantly reduced state regulation, fostering an environment that is more responsive to market forces and international dynamics.

Number of equitized state-owned enterprises and number of newly listed companies on the stock market over the years (1999-2022, source: SSC, MOF)

Investment opportunities in Vietnam

We believe Vietnam is an attractive investment destination for the following reasons.

● High economic growth: As outlined in the early 2023 growth scenarios, the government envisions a substantial increase in GDP per capita, aiming for a remarkable range of $27,000 to $32,000 by 2050. Sustaining this upward trajectory necessitates maintaining an annual growth rate of 6.5-7.5% throughout the period from 2030 to 2050. Further underlining this optimistic outlook, the IMF World Economic Outlook, published in October 2022, forecasts Vietnam’s ascent to 25th place among the world’s 30 largest economies by 2035, with a subsequent climb to the 20th position by the year 2050. These projections underscore Vietnam’s robust economic potential and its promising position on the global economic stage.

Change in rankings of the world’s 30 largest economies in the next 30 years (source: IMF World Economic Outlook and UK Department of Business and Trade).
Note: Rankings are based on nominal GDP expressed in percentage of global nominal GDP (inclusive of inflation and converted using time-varying exchange rates). Totals may not equal 100% due to rounding.

● Stable political system with market-friendly orientation: Vietnam has a stable political system along with a moderate and open foreign policy. In addition, the government also issued many preferential policies to attract investment flows from abroad, including both direct and indirect investment. This is an important foundation for Vietnam to become an attractive destination for businesses and foreign investment funds.

We have performed in-depth analysis of businesses as well as industries on the Vietnam stock market. Our findings reveal several compelling investment prospects, notably in the following sectors: retail, consumer goods and real estate. These sectors are direct beneficiaries of strong demographic and economic trends. The combination of a large and youthful population, entering their ‘golden population’ period, and the steady rise of the middle class create a favorable environment for growth in these industries.

Vietnam’s population, which ranks 14th in the world at 100 million, is characterized by its ‘golden population’ structure. This demographic phase, where the working-age population significantly outnumbers dependents, has been in play since 2007. However, there is an imperative for Vietnam to capitalize on this phase by boosting per capita income, to prevent slipping into the ‘middle-income’ trap.

Population pyramid of Vietnam in 2019 and 2039 (source: GSO Vietnam)

The rise of the middle class is essential to sustainable development of a country. This is a group with a high level of consumption, the ability to save and accumulate assets. The growth of this population group will promote the growth of the real estate, consumption, and retail sectors. A study by HSBC forecasts that the upper middle class in Vietnam, those with a daily income of $50-110, is set to increase by an average of 17% annually between 2021 and 2030.

Another McKinsey report – “The Future of Asia – The New Face of Vietnamese Consumers” – further underscores this trend, indicating a substantial growth in the population with a spending level of $30 per day or more. This increase from 4 million people in 2020 to 20 million by 2030 represents an average gain of 1.6 million people annually, all with an income of $23,400 or more.

Population by income group (daily spending) (million, 2011 purchasing power parity (PPP), source: McKinsey)

The current urbanization rate is still low, but high urbanization rates and high infrastructure investment needs in the future will promote the development of steel making and energy industries. We have screened, evaluated and placed a number of potential businesses on our watch list.

Vietnam currently has a ratio of population living in urban areas that is lower than the world average and much lower than this ratio in developed countries. According to CIA World Factbook data, in 2020, Vietnam’s population living in urban areas ranked 150/229 countries and territories at 37.3%, compared to the world average of 56.2%.

However, Vietnam is the country with the fastest growth rate in the proportion of population living in urban areas in the world, ranking 49/229 countries and territories in the world and ranked 6th in Asia, with an increase of 2.98% / year (period 2015-2020), ~ 1.5 times higher than the world average in the same period of 1.9% / year.

Number of urban areas in Vietnam (1990-2022, source: Ministry of Construction, GSO Vietnam)

Last but not least, we have been conducting research, looking for “star” companies in basic industries such as banking, chemicals, pharmaceuticals or utilities. These businesses often have sustainable competitive advantages and are capable of maintaining growth over the long term.

Advantages of XSTAR when investing in Vietnam

Investing in Vietnam with XSTAR presents a host of strategic advantages that set us apart. These encompass:

● Local Expertise: Our team is composed entirely of individuals born in Vietnam, mitigating language and cultural barriers in our market, industry, and business research endeavors. This inherent understanding allows for a seamless navigation of the local landscape, fostering effective communication and rapport.

● On-site Analyst Presence: XSTAR has an on-site analyst currently residing in Vietnam. This strategic placement affords us an unparalleled depth of knowledge across various facets, including politics, legal intricacies, business culture, consumption patterns, and investment habits. This real-time, firsthand insight extends to the operational dynamics of businesses and industries, macroeconomic fluctuations, and access to unofficial but crucial information.

● Advisory Board Support: Adding to our strength is the invaluable support from our esteemed advisory board. Comprising leading experts in macro strategy, investment, and finance within Vietnam, they bring a wealth of experience and foresight to our decision-making processes. This collaborative approach ensures that our investment strategies are not only grounded in local expertise but also benefit from the wisdom of seasoned professionals in the field.

By leveraging these distinct advantages, XSTAR stands uniquely positioned to navigate the complexities of the Vietnamese market, making informed and strategic investment decisions.

Potential risks

Besides the opportunities mentioned above, with the utmost caution, we also recognize certain potential risks of the Vietnamese stock market.

Geopolitical risks

Vietnam holds a significant geopolitical position in the Asia-Pacific region, notably due to its proximity to the South China Sea, a vital maritime route connecting major global regions. The potential for territorial disputes and tensions in this area could pose risks to the Vietnamese economy. Ongoing tensions in the South China Sea require vigilant monitoring, as they have broader implications for regional and global stability.

Legal risks

Vietnam’s legal system has evolved but remains complex, with potential conflicts between regulations. This causes legal risks for both investors, businesses and law enforcement officials. Changing or supplementing laws or regulations without considering the rights and interests of related parties can lead to losses for investors. A typical example is the series of events related to corporate bond regulations that occurred at the end of 2022, causing uncertainty and volatility to both institutional and individual investors.

Market risks

While Vietnam’s stock market holds promise, it remains relatively small in scale compared to developed markets. This smaller size increases the risk of market manipulation. Additionally, the market structure presents some challenges, including a high concentration of market capitalization in certain industries such as banking and real estate. The number of new listed companies has been decreasing over the years, and a significant proportion of the market is comprised of cyclical stocks. These issues may result in the Vietnamese market lacking the factors needed to attract sustained long-term investment capital flows.

Market capitalization proportion by sector of VN-Index (as of September 2023, source: https://markettimes.vn/)

It’s important to highlight that both the government and the Vietnam State Securities Commission have taken significant steps to enhance market integrity. They have issued regulations, strengthened supervision, and imposed penalties, including prosecution, on individuals or organizations engaged in market manipulation. Additionally, initiatives to upgrade the market’s classification from frontier to emerging status, along with the implementation of IFRS financial reporting standards, aim to mitigate market risks and improve efficiency.

Looking forward, while these risks remain areas of concern, the proactive response from authorities and the ongoing efforts to enhance transparency and market integrity suggest a commitment to creating a more robust investment environment. Investors can anticipate a reduced level of legal and market risks in the future.

Exchange rate risk

Exchange rate risk is always a concern for foreign investors. Sharp fluctuations in exchange rates can affect the performance of foreign funds. As mentioned above, the Vietnamese government has done a good job of controlling the exchange rate in the past 10 years, maintaining the average depreciation rate of VND compared to USD at only 1.2%/year. However, it is necessary to closely monitor factors that can affect exchange rates such as balance of payments, interest rate levels and foreign exchange reserves.

Conclusion

We believe Vietnam is a growth market with inherent advantages and promising investment opportunities. Our investment strategy is anchored in a commitment to rigorous research and the identification of robust companies capable of sustained long-term growth, even in the face of market challenges. While positive macroeconomic factors serve as a solid foundation, we emphasize the importance of a bottom-up approach in guiding our investment decision-making processes.

At the end of the day, we are investors in companies, not countries. Our differentiation comes from being able to identify great companies, and investing alongside them over a longer time horizon than short-term traders are willing to commit. As we navigate the dynamic landscape of the Vietnamese market, our commitment to prudent analysis and principal safety remains unwavering.