With the Vietnam stock market having an excellent 2021, it is easy to get swept up in all the bullish articles appearing online. In the last blog post I admittedly only covered the bullish side here, Should I invest in the Vietnam stock market? – VIETNAM STOCK MARKET (vietnamesestockmarket.com). Now it is time to touch on the disadvantages of investing in Vietnam. Read on to note the key risks of investing in the Vietnam stock market. Like many frontier markets, risks such as political risks, legal risks and currency risks also are factors to consider when deciding should I invest in the Vietnam stock market.
New covid outbreaks in Vietnam and slow vaccine rollout
Unfortunately Vietnam are experiencing a surge in covid cases in the last couple of months. Prior to that they had dealt with the virus extremely well. A lot of things need to go right from here to see that they get adequate supplies to get near 70% of the population vaccinated in 2021.
Tourism also is a key contributor normally to the country’s economic growth. If problems relating to covid and a slow vaccine rollout linger then the prospects for a bounce-back in tourism may be significantly delayed.
Repeat of Vietnam’s financial instability seen after the global financial crisis in 2008
Whilst Vietnam’s financial markets have enjoyed stability over the last 7 years or so, if we go back a few years more in time we get a glimpse of the volatility that frontier markets can bring.
The above credit growth and inflation dynamics flowed through to see plenty of turmoil in interest rate, currency and stock markets.
Whereas if you are looking to invest in many developed stock markets across the globe and look back over the last 20 years, you don’t see such volatility.
Whilst the signs are reasonable that recent stabilisation will continue, some sort of shock to the system might easily place doubts in investor’s minds given this history and lead to significant stock market weakness.
Vietnam currency risks
Some of the turmoil I referred to just above is reflected in currency movements in the early 2010s. We can see from the chart below from 2011 to 2015 the USD appreciated significantly versus the Vietnamese Dong.
The media even has ran stories in recent months about the US labelling some countries including Vietnam as having criteria that met the label of currency manipulators. This could be an issue the market focuses on in the future and a possible risk. Having said that I do find it amusing this coming from the US, given how they interfere so much in their own bond market in the last 15 years.
Vietnam debt burden risks
In the early 2010s I remember markets were more fixated on overall debt levels of a nation. The popular book “This time is different” by Reinhart & Roggoff, was getting a lot of attention at this time. At the same time many governments throughout the world saw their debt levels spike. Whilst markets appear to more relaxed on this nowadays, markets are fickle enough that it could again be a key focus gain in the future sometime.
Vietnam saw their government debt levels hit new highs around 60% to GDP in 2016 because of the fallout of a tough time economically since the global financial crisis in 2008.
They seem to have things under control since, however they don’t have the luxury of more developed countries to be complacent on this. Household debt has also been growing strongly since 2013 like other South East Asia nations and this is worth keeping an eye on as a potential risk also.
Vietnam’s population is ageing quickly
The fact that the growth of those in the Vietnam population are hitting “middle-class” economic levels is strong is good news. A flow on for this though is that rising wealth leads to a greater array of opportunities for individuals. When this happens it is not uncommon to see birth rates in decline. Whilst Vietnam are in somewhat of a sweet spot with a relatively young population and workforce, in a decade or two things will shift. The number of people over 60 as a percentage of their overall population is going to rise drastically by 2050.
Risks surrounding Vietnam-China relations
Relations are complex and probably beyond a relatively short blog post like this to go into in depth. They are quite connected in terms of trading partners and location. Therefore stock market investors will be keeping an eye on there hopefully being no tensions in the relationship. It is fair to say some global investors view China’s power as a threat so this is an important factor to watch. At this point of time I view the Vietnam stock market as being comfortable that these risks are quite low. That makes the market vulnerable to any change in this perception.
Political risks in Vietnam
It might have been apparent from the point just above that I am not interested in getting over political on the blog. I hope to visit Vietnam again sooner rather than later, so I am not about to predict any disaster in terms of political risks here. However political risks are always front of mind for frontier market investors. The strong Vietnam share market arguably currently has plenty of faith in the country’s political stability. Should any issues therefore flare up in a negative way that would have the potential to cause some major declines.
Legal risks in Vietnam
Things are on the improve but I think it is fair to say that you shouldn’t necessarily expect that all laws, rules and regulations, corporate governance etc are what you might be used to in other developed nations.
Risks of a global economic downturn
Whilst one of the key attractions to investing in Vietnam is the potential of its improving manufacturing sector, this does leave it vulnerable to shocks in demand from developed countries. Vietnam may well do everything right in terms of executing it’s growth strategies in this area, but at the end of the day many of their businesses are exporting to the major developed economic trading partners in the world.
Choosing the wrong way to get exposure to the Vietnam stock market
Do you buy Vietnam stocks directly and hold them via broker relationships on the ground in Vietnam? Do you buy a Vietnam ETF? Do you invest in a Vietnam managed fund? Do you buy a Vietnam closed end fund listed in London?
All have some disadvantages that you need to be aware of. I hope to explore the pros and cons more of these sorts of options in future blog posts.
Vietnam stock market one of world’s best performers in 2021, overbought and due for correction?
What goes up eventually comes down!? It is fair to say the Vietnam stock market might be due for a breather soon..
SHOULD I INVEST IN VIETNAM? IS THE VIETNAM STOCK MARKET WORTH THE RISK?
A lot of the key risks of investing in the Vietnam stock market are those that you normally associate with investing in frontier markets. Vietnam seems well placed to navigate these. Even if they do though the ride is still highly likely to be very bumpy for stock market investors along the way. Therefore it is crucial that prospective investors in the Vietnam stock market are well aware of risks such as above early on. No doubt there will be times when your conviction gets tested.
To summarize, here are the key risks of investing in Vietnam:
- covid risks to do with slow vaccine rollout
- financial instability of a frontier stock market
- debt burden
- ageing population in the very long term horizon
- relations with China
- political risk
- legal risks
- vulnerability to a weakening global economy
- picking the wrong ways to invest in Vietnam
- overbought stock market
Is Vietnam a good investment?
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