It’s almost midnight on Dec. 21, 2015, but one after another the planes continue to land at Tan Son Nhat International Airport in Ho Chi Minh City, Vietnam, bringing tourists and business professionals from all corners of the globe.
Many of these people have never been to Vietnam before, but all, upon exiting the ultra-modern airport building onto the streets of Ho Chi Minh City, will be overwhelmed or energized by the frenzy of a high-octane metropolis — one that doesn’t ever sleep, and where modernity is rapidly replacing tradition.
Here, glassy skyscrapers tower over colonial villas. Brand-spanking-new BMW X5s and Mazda CX-9s compete for road space with rickshaws and motorbikes, and an ever-growing number of Starbucks-style cafes and fast-food restaurants mushroom alongside sidewalk banh mi (Vietnamese sandwich) stalls.
This is Vietnam in 2016. It is a far cry from the war-weary, Communist nation that many Americans, including advisors and their clients, still believe it to be.
Peter Kohli, founder of DMS Funds in Leesport, Pennsylvania, has never been to Vietnam, but he is one of a growing number of financial advisors who believes that the Southeast Asian nation offers one of the most compelling long-term investment potentials in the emerging markets world.
That belief is not only based on the fact that the Vietnamese government has, over the past few years, taken a number of important, market-oriented steps to attract both foreign direct investment and private funds from overseas. What’s most telling for Kohli is a 2014 survey conducted by the Pew Research Center, in which 95% of the Vietnamese population stated that they favor capitalism over any other economic system. Even in the United States, only 70% of the population favors the free market, according to the survey.
It is still difficult to invest in Vietnam — the only dedicated investment vehicle is Market Vectors’ Vietnam ETF (VNM) — and there are no Vietnamese ADRs. Sector diversification is still limited, but the demand for Vietnamese equities is nevertheless strong and sure to rise once stock market constraints ease, said Edward Kerschner, vice chairman and chief investment strategist at Emerging Global Advisors in New York.
Vietnam, in his view, embodies all the right growth metrics: It has a young population of almost 90 million, most of whom were born long after the war with America; a GDP per capita of close to $2,000, according to the World Bank; and most important, it has become Asia’s new manufacturing hub, taking over the production of low-level goods from China and Thailand, where wages are now much higher.
Consumption and Commodities
In many ways, Vietnam is quintessentially Asian, embodying those growth traits that, for a growing number of investors, make Asia the emerging markets region with the most investment potential.
Although the global downturn that has affected emerging markets over the past few years has had an impact on Asia as well, affecting Asian currencies and sending stock prices down, the region still benefits from many positive drivers and remains the world’s growth engine, said Andrew Gillan, head of Asia ex-Japan Equities and portfolio manager of the Asia Pacific sub-portfolio of the Henderson International Opportunities Fund in Singapore.
Despite slowing headline GDP growth from China, Asian growth remains strong relative to other emerging markets, Gillan said, creating strong investment themes and numerous investment opportunities.
Perhaps the strongest of these themes has to do with global commodity prices.
Of the four major emerging market regions — Asia, Central and Eastern Europe, Middle East and North Africa, and Latin America — Asia has the highest dependence on commodity and commodity-related imports, which makes it extremely susceptible to rising or falling commodity prices.
Since commodity prices have been so depressed (according to the S&P GSCI Total Return Index, the leading measure of global commodity price movements, prices fell by almost 58% from the middle of 2014 to the end of 2015), Asian countries — many of which are commodity importers — and their citizens have benefited enormously, said Rajeev De Mello, head of Asian fixed income at Schroders in Singapore.
“Commodity prices are widely expected to stay low for the coming year as Chinese demand is expected to remain muted and supply has only been adjusting slowly,” De Mello said.
Countries like India, the Philippines and Vietnam (net importers of energy and other commodities) have benefited from low commodity prices, especially lower oil. Other nations like Indonesia and Malaysia (net exporters of both hard commodities and oil) as well as Thailand, Taiwan and South Korea (which export goods and services to China) have felt the sting of depressed global prices, although most of their governments have remained fiscally prudent, De Mello said, with their central banks running a very cautious line to keep economies safe.
Those Asian countries that have suffered on account of depressed commodity prices have tried different measures aimed at boosting economic growth through domestic demand, Kerschner of EGA said, including reducing interest rates to encourage borrowing for consumption — which, in his view, is one of the most important emerging markets investing themes playing out in Asia.
“Asia is home to most of the world’s population, and these people are experiencing rapid increases in income and joining the global middle class at a faster pace than any other region globally,” Kerschner said. “The size of the global middle class is projected to increase from 1.8 billion people in 2009 to 3.2 billion by 2020 and to 4.9 billion by 2030, and 85% of this growth comes from Asia. Global spending by the middle class is projected to grow from $21 trillion in 2009 to $35 trillion by 2020 and $56 trillion by 2030, and again, over 80% of this growth in demand comes from Asia.”
According to Kerschner, the size of the Asian middle classes and the spending power of the Asian consumer — who is keen on everything from goods and services to housing, health care and insurance — has moved from “immaterial to meaningful in the first decade of the 21st century.”
Both the Organization for Economic Cooperation and Development (OECD) and the World Bank have projected that the Asian consumer will dominate global consumption by the end of the first quarter of this century, driven by rapidly growing middle classes in India, China, the Philippines and Vietnam, among others.