Should I invest in the Vietnam stock market?

Vietnam has been one of the strongest stock markets in the world in 2021 and is considered a frontier market by many. The prospects though to be upgraded to emerging market status by market indices providers is one bullish argument for the future. In this blog post I shall examine the other bullish factors that argue for one to invest in the Vietnam stock market. The strong relative economic growth outlook for 2021 – 2022 and beyond are increasingly placing Vietnam on the radar of global investors.

Favourable demographics in Vietnam and urbanization trend

The 15–64-year-old age range which is considered the working age population, is at a higher proportion of the overall population, compared with the rest of the globe. Declining birth rates might see the picture change in a decade or two from now like many places in the word, but currently Vietnam are in a favourable spot here.

Another important factor is that this working age population is actually in work! Those with a propensity to work is expected to continue to grow significantly over the next decade.

A helpful trend is the increasing amount of the population that are moving from the countryside into cities looking for work. Over the long term the percentage that join the “middle class” in global terms will grow. As the cities grow the government also seems committed on building infrastructure, which provides a further backdrop for strong economic growth.

Cheap source of labor in Vietnam and attractive outsourcing destination for global companies

The below chart is a bit busy and maybe not so clear to see where Vietnam sits. In part though that is because Vietnam has one of the lowest production / labor costs in this regional survey.

With some big global companies increasingly thinking about rising costs in China and general uncertainly, the idea of diversifying some manufacturing operations by setting up in Vietnam is gaining traction.

Strong economic growth outlook for Vietnam, solid economy since covid outbreak (so far anyway!)

Vietnam was one of few countries to record economic growth in 2020. The tourism sector is important and was hit badly; however other parts of the economy helped cushion that blow. They manufacture various products needed for the work from home theme. They dealt with the risks of covid well.* As I touched on above Vietnam was seen as a favourable manufacturing hub so avoiding large major lockdowns ensured some good productivity continuing.

Touch wood, at the time of writing Vietnam is experiencing a surge in covid cases over the last couple of months but hopefully they can get things under control like they did in 2020.

If you want to know more about the Vietnam economy in general, refer to my recent article here that gives an overview of the Vietnam economy, OVERVIEW OF VIETNAM ECONOMY, HOW IT AFFECTS THE STOCK MARKET – VIETNAM STOCK MARKET (vietnamesestockmarket.com).

Vietnam’s relatively attractive stock market valuations

I should caution that the below chart is nearly a couple of months old and already the market generally has been stronger. I did refer to this chart in an earlier post and I still think it is interesting in terms of stock market valuations compared with other countries in the region. Note that the fund here has a bias to smaller opportunities, however at the bottom of the table we can observe the wider Vietnam stock market stats. I still think it stands out as reasonably attractive given that Vietnam is recording good economic growth.

Source: Asia Frontier Capital

Improving ease of doing business in Vietnam

Vietnam has improved its ranking greatly over the last decade in the “ease of doing business” rankings. Government actions in recent times should see this general trend continue.

Increased openness to foreign investment in the Vietnam stock market

Changes in recent years have headed towards a stock market that is welcoming more foreign investors. The existence of various rules on foreign ownership limits on Vietnam companies has led to some reservations on behalf of global investors about getting involved. Rules can be complex and be a barrier to boosting overall liquidity. Further relaxations in such rules in the future could be bullish for the market.

Possible future upgrade to emerging stock market status for Vietnam from global market indices providers

Vietnam stock market bulls often point to this factor occurring sometime in the next few years. Such a move would further put Vietnam on the radar of global investors. This is discussed in the article here. Is Vietnam the Next Emerging Markets Star? (etfdb.com)

Political stability and optimism in Vietnam

To put it simply here, there is a level of confidence of the Vietnam population that their living standards are on the rise and will continue to get better. This provides a stable backdrop, one that you can’t necessarily confidently say about many other places in the world.

Improvements in Vietnam financial market stability

The Vietnam economy experienced some turbulent times around the global financial crisis in 2008 and the following few years after that. The outlook appears more stable as the country learns from this period. I touched on various economic stability factors in my last blog post here. OVERVIEW OF VIETNAM ECONOMY, HOW IT AFFECTS THE STOCK MARKET – VIETNAM STOCK MARKET (vietnamesestockmarket.com)

Increasing amount of new trade agreements with Vietnam

Vietnam have been busy on this front. The agreement with the European Union in particular was a key milestone after the many years it took to reach. It gives confidence to investors that Vietnam’s competitive position will remain sound into the future.

IS VIETNAM A FRONTIER OR EMERGING stock MARKET?

As disused above there is a range of factors that provide a bullish backdrop for the outlook of the Vietnam stock market for 2021 – 2022 and beyond. They center on Vietnam being a classic story of a frontier market going through the next stages of development. There is increasing FDI, favourable business policies, political and social conditions offering optimism, and we are early on in the stages of foreign investors spotting the opportunity in the Vietnam stock market.

According to the major stock market indices providers at the time of writing, Vietnam is still classified as a frontier stock market. It is on a list to watch to be considered for being upgraded to classified as emerging, I think we are getting close to this occurring which would be bullish.

Despite such a strong run up in the stock market of late, I would guess that Vietnam is still in the earlier stage of the structural bull story if anything. A good book that touches on the life cycle of emerging markets is Tomorrow’s Gold, by Marc Faber. When I look back at that book, I think of Vietnam being more in Phase one of Marc’s three bullish phases for emerging market stock markets.

Vietnam stock market history

However frontier market investing is not for the faint hearted. You can check out my previous blog post that displayed a chart of history of the Vietnam stock market and how much it fell around 2008! It would be quite normal to experience sharp corrections of 30% or more amid a still longer-term bull market cycle. Remember even before covid struck the Vietnam stock market fell sharply in 2018.

Therefore I realise this blog post has been one sided in weighing up the question of should I invest in the Vietnam stock market. Therefore in my next article I plan to discuss a lot of the risks out there in investing in Vietnam stocks.