Vietnam – leader of the pack

Welcome to Vietnam

Vietnam is a high growth market situated in the heart of Asia. Its cohesive population of 100m people is young, hard-working and increasingly digitally connected. Over the last 30 years, Vietnam has experienced high levels of GDP growth, averaging about 6 to 7% and attracting record levels of Foreign Direct Investment (FDI) with almost USD 20 bn in 2019. It also is an increasingly open economy, with trade equivalent to 200% of GDP, and the government has negotiated a number of free trade agreements. Vietnam is one of the original countries in what was formerly known as the Trans-Pacific Partnership TPP and is now the somewhat unpronounceable alphabet soup of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CTCPP). In addition, Vietnam recently approved a bilateral EU free trade agreement, which could serve as a model for a new free trade agreement with the UK.

Perhaps more important than a static GDP number is the per capita GDP which has just recently passed USD 3,000, which is considered an inflection point in an emerging consumer society. For example, Thailand doubled its GDP from this point in seven years and China doubled its GDP within five years.

Vietnam has emerged from the COVID-19 crisis as a winner. Its capital markets are set for expansion, the infrastructure is improving, and it will continue to attract interest from manufacturers and other types of companies looking to diversify away from China.

V for Victory – against the coronavirus

Vietnam declared war on the coronavirus in late January and emerged victorious in containing it within about 90 days by the end of April. The government was very quick to react when the first cases were confirmed during the Lunar New Year (‘Tet’) holiday in January by imposing a large-scale quarantine, stopping flights to China, and implementing control and trace to identify outbreaks. It also employed all the tools in the ‘media’ armory to keep its citizens informed via social media, traditional media, as well as propaganda art.

Vietnam is in many ways a Confucian ‘East-Asian’ society, with strong community values, and adherence to authority. Its social cohesion and the government’s effective response meant that Vietnam was one of the first countries to come out of lockdown at the end of April after a relatively short three-week lockdown. Since mid-April, there have been no community spread cases, and remarkably, in a population of close to 100m people, there have been less than 420 infected cases in total and zero deaths. The closest someone came to death was a British pilot with Vietnam Airlines, the National Carrier, an unfortunate super-spreader at a popular expat-bar in Ho Chi Minh City’s District Two. He was in a coma and at death’s door for almost 100 days in an Intensive Care Unit in Vietnam. The Vietnamese people rallied around him, even offering him their own lungs, and he went on to make a complete and full recovery. He has now returned to his home city of Motherwell in the UK, saying that ‘I would have died’ if it were not for Vietnam.

As a frontier market, it is estimated that only one in five emerging market investors are present: it will be a game-changer in a few years if and when Vietnam is classified as an MSCI Emerging Market.

V-Shaped recovery

Vietnam has the potential to make a V-shape road to recovery post-pandemic. The Purchasing Managers Index (PMI) rose sharply from the depths of the pandemic, as the country gradually went back to work. Retail sales have also been rising, though some discretionary spending has been unsurprisingly delayed. The GDP growth for the first six months of 2020 was 1.8%, and the full year is expected to be somewhere between 3% and 4%. This is lower than the 6-7% trend but is a rare positive number in a world of fearful negative growth forecasts.

Prospects for Vietnam will be strengthened as more manufacturers look to its proximity to key markets and abundant, well-educated and young workforce as a powerful source of production. Last year’s trade spat between the US and China accelerated a ‘China-plus-one’ strategy as supply chains are increasingly being broadened in an attempt to diversify risk and bend costs down. Vietnam has seen decades of strong FDI into the manufacturing sector and has enhanced its logistics and business-to-business (B2B) services to facilitate this growth. A number of international companies have started to relocate to Vietnam, and there is strong evidence of that trend continuing as Apple and other global brands look to increase what they make in Vietnam. That will also have a positive knock-on effect in the private sector. In the 1980s and 1990s countries such as Singapore and Thailand adopted a Michael-Porter inspired ‘cluster’ approach to creating centres of specialized large-scale manufacturing (for hard disk drives, semiconductors, and cars). This approach can lead to a localized supply chain for the brand-owner and its myriad of sub-contractors. This notion has already attracted Samsung, which makes nearly every tablet and phone in Vietnam with close to 100,000 employees across the country and has accelerated the expansion of Vietnam’s industrial parks.

In addition to the planned investment by the government into infrastructure (a total amount of USD 30 bn over the next few years), Vietnam’s private sector will also see increasing opportunities. The government recently passed a Private-Public-Partnership (PPP) law to encourage private investment as a means to finance infrastructure. Unlike the UK where the government plans ‘brown-field’ rejuvenation of existing commercial and retail centres in an attempt to breathe life into hollowed-out sectors, much of the infrastructure development in Vietnam is in ‘green-field’ projects. This could have a multiplier effect on economic growth.

After a few years of hibernation, the privatization of state-owned assets and enterprises looks likely to resume this year. The government is committed to selling off selected equity stakes in listed companies that it still owns, as well as privatizing businesses for the first time. One of the stakes set for sale is in the country’s largest brewer (and the world’s 20th largest brewer by volume) Sabeco (HOSE: SAB), which produces the popular Saigon and ‘333’ rice-brewed beers.

Most importantly perhaps for investors, is the way in which the capital markets have grown and deepened. Daily liquidity across Vietnam’s stock markets is currently around USD 350m. This is more than the entire size of the market back when the UK’s Prudential (now Eastspring) was an early successful investor on behalf of its Vietnamese life insurance customers in the capital markets.

Although Vietnam has many of the characteristics of a more recognized ‘emerging market’ in part due to the size of the equity market already being above USD 160 bn, and with more than 1,500 companies to invest in, it is still classified by MSCI as a frontier market. In fact, this year Vietnam is likely to be the largest component of the Frontier Market Index. As a frontier market, it is estimated that only one in five emerging market investors are present: it will be a game-changer in a few years if and when Vietnam is classified as an MSCI Emerging Market.

Vietnam has emerged from the COVID-19 crisis as a winner. Its capital markets are set for expansion, the infrastructure is improving, and it will continue to attract interest from manufacturers and other types of companies looking to diversify away from China. Its macro-economic position is the envy of much of the world, and this could improve in a scenario where the US dollar weakens. Clearly the world as a whole is facing uncertainties, and there will be winners and losers ahead. Vietnam has signaled the ‘V’ for Victory sign against the devastating coronavirus, and this fast-growing country of 100m people is one to keep an eye out for in the months and years ahead.

Minority Report

The problem with minority investing is information asymmetry. This is often inflated by optimism bias on behalf of the majority investment partner. When private equity investors in emerging markets seek to address this, they end up with a complex document to provide downside protection and seek to control their rights as a minority investor in what is often a family owned business.

During the week Vinacapital, an experienced investor in Private Equity in Vietnam, managed to extricate itself from a six-month-old US $32.5m investment in Vietnam’s largest poultry company following a dispute relating to the interpretation of its shareholder agreement. The local company made its complaint public, saying that they didn’t fully understand the investment terms they were signing up to as they were drafted initially in English and not Vietnamese. This sounds like an unlikely reason: Vinacapital’s team is multilingual and experienced in negotiating shareholder rights. A more likely scenario is that there was a disagreement relating to performance milestones, adjustments to investment valuation or other rights that the family-owned company were willing to yield initially based on their optimism, and now regret based on the reality of the 6 months performance since investment.

There are a number of private equity firms who do not make minority investments as a house rule, preferring control, or ‘buyout’ deals. They, rightly, claim that it is easier to manage one’s destiny (particularly relating to exit) when you own a significant and controlling part of the equity. That said, if there is an alignment of interests, minority investing can work. As an investor you don’t need to run the company, you work with the existing owners and typically are providing expansion or growth capital, rather than cashing out a selling shareholder. In the emerging markets of South East Asia, minority investing is more prevalent. If the chemistry fails, as is clearly evident in this recent Vietnam case, then better to pull the plug early. Thankfully for its own investors, Vinacapital managed to extract its full investment amount and lives to fight another day.

Malaysia, truly amazing

The results of Wednesday’s election in Malaysia caught most pundits by surprise. 92-year-old Dr. Mahathir pulled off an incredible victory. Having Anwar pardoned was a key result, and his cell might have other notable occupants in the months to come.

The impact on the Ringitt is not clear, as the wise Dr. called a public holiday for two days. He made some encouraging sounds about the business-friendly policies his people will pursue, and in effect talked the Ringitt up. In the illiquid Non-deliverable forward markets, the currency was marked down, but let’s see what happens when the markets open again next Monday.

There will be some casualties in the equity markets – some of the conglomerates too close to Najib will get a bloody nose.

It was a refreshing moment for most Malaysians, who had dared to hope that change was possible. With Oil predicted by many to head above $100 a barrel, there could be some good economic news for Malaysia. If the promises of a U-turn on GST come into fruition, then the consumer might start to feel better off. Consumer stocks might be the way to go over the next few months.

Hun Sen in Cambodia will be watching this election result carefully: despite having tied up most of the opposition, and jailed others, the days of Kleptocratic ASEAN leaders might be in doubt.

There’s an awful lot of Coffee in Vietnam

“A politician’s daughter was accused of drinking water and was fined a great big fifty-dollar bill, ‘cos there’s an awful lot of Coffee in Brazil” Frank Sinatra

Vietnam is one of the world’s largest exporter of coffee by volume, but not by value, second perhaps only to Brazil, whose volume of Coffee was crooned by the legendary Sinatra. The industry in Vietnam employs 2.6 million people (about 3% of the 90m population) and produces more than 1.3 billion tonnes annually, of which Robusta accounts for approximately 97%. Exports account for more than USD 1.3bn an important part of the country’s balance of payments.

Aside from the growing and export business, there is a fantastic local coffee culture. Although traditionally a tea culture, and ‘Cha’ or ‘Tra” is served as an accompaniment to coffee in local shops, coffee was introduced to Vietnam by the French in the mid-1800s.
Today there are several international branded high-end coffee chains including Starbucks and Coffee Bean & Tea Leaf, a number of high-end home-grown favorites including Trung Nguyen and Highlands Coffee, and a plethora of mom-and-pop coffee shops serving the masses. The leader in the latter category is Milano Coffee. Fantastic and affordable iced coffee – Ca Phe Sua Da. Try it next time you are in Saigon.

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Myanmar has Jaded Western eyes – now China’s opportunity?

Myanmar is a complex country at the geographic crossroads of India and China and the temporal crossroads of a frontier economy and a failed state. After several years of being wide-open to Western admirers, there is now a potential pivot to China.

In Pakistan, as an example, China has agreed to invest around $70 billion in infrastructure development in recent years, in Myanmar only $15 billion has been invested by China over the past three decades. In 2012 when Myanmar opened up more, it was in part to pivot towards the West, and not become dependent on China. The West eagerly pounced on the opportunity, with Hillary Clinton and President Obama, welcoming the reforms and putting Aung San Su Kyi on a very high pedestal.

The November 2015 elections initially appeared to be a milestone for Myanmar’s reform, and a legacy for the then President Thein Sein, with a sweeping win for Aung San Su Kyi’s party, but the fact that the Generals retained a key 25% block in Parliament quickly started to cast a shadow. Despite that, Billions of dollars of aid and investment flowed into the country, with dramatic impact seen in several areas. Land prices sky-rocketed, and everybody looked at putting a toe in the water.

The shine came off the Golden Land very quickly in 2017 when the problems in Rakhine state illuminated more issues than the West was really keen to know. Firstly, the Military is very good at reacting swiftly and fiercely to any challenge on its borders, as it has been hardened for many years in its battles with Ethnic groups in the northern Shan states. Secondly, the ruling party has little visible power, particularly as it has to contend with the blocking 25% stake held by the Military. Thirdly, Aung San Su Kyi has disappointed many in her apparent inability to act decisively, being the politician first and Nobel Laureate and icon of hope second. Lastly, perhaps more worryingly, is the attitude of the general population themselves to the Rohingya issue.

The Rohingya have little support among Myanmar’s 135 distinct ethnic groups, across the spectrum of religious, economic or educational levels. They are not valued as citizens of Myanmar. Their land sits in an important geographical area which promises access to resources for foreign investors, particularly the Chinese. They do, of course, have different religious beliefs to the majority of the predominantly Buddhist Myanmar people, but the problem is not only about religion.

The refugee crisis that is emerging as a result of the clearing of the Rohingya is possibly the worst in the world, on par with Syria. The world is unprepared. Bangladesh, the recipient of much of the recent influx, possibly numbering close to one million displaced people, is unable to cope and contain these starving and maltreated people.

The pressure on Myanmar will almost certainly increase. Its golden shine has been indelibly tarnished, and the next few years will bring domestic political change, possibly a coalition, or worst still a more pro-Military led parliament, once more, but almost certainly consigning the legacy of Aung San Su Kyi to disgrace. What this means for investors is unknown. There have been some positive improvements for Myanmar’s 60 million people, in particular, a dramatic improvement in its connectivity – now more than 80% of the population have access to a data-enabled phone. Information is more free-flowing, at least for now, for as long as the Military does not interfere too much (It controls one of the four mobile telecoms company, MPT, and is friendly to the fourth, controlled by Vietnam’s military.)

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The Chinese are willing to protect Myanmar’s Generals and may become the source of financing for infrastructure development that is much needed, and which Japan and some of the multilateral agencies may be unwilling or unable to provide if targetted sanctions are re-imposed.

Myanmar Motors On

0+VSt4UUQ8a+cqPQ3dZVxA For a large city in ASEAN, one thing is striking about Yangon: there are no motorbikes. Having lived for several years in Vietnam, I got used to the gentle ebb and flow of motorbike traffic, which you can walk through like Moses parting the Red Sea. Yangon is markedly different, The story is that a general/government official was assassinated by someone driving a motorbike, therefore a ban was initiated. The only people allowed to drive motorbikes are policemen and electrical repair-men. I figure that a good business idea would be to buy and electrical repair business and use it as a front for a pizza delivery operation.

The consequence of this is an abundance of cars. Motor Mania in Myanmar.

In the mid-1990s I was involved in a business in Myanmar importing brand new Land Rovers and BMWs and repairing the 3000 odd existing Land Rovers in the country. The business was sold to Astra of Indonesia in the late 1990s not long before the Asian Financial Crisis hit. Astra is now owned by Jardine Cycle & Carriage, a stock I hold today.

There are approximately 430,000 auto-mobiles registered in Yangon, including 57,000 taxis, out of a total of 640,000 vehicles in Myanmar as a whole.

The problems are obvious to visitors to Yangon, pavement parked cars, and slow-moving traffic. Other issues are an increase in road traffic accidents, with almost nine accidents a day leading to two deaths per day in vehicle-related accidents.

Some of the causes problems are subtle – a mixture of left hand and right-hand drive cars, all driving on the right side of the road, and the lack of car-parks or adequate basement parking in buildings. As the economy continues to grow, and as the affluence increases from a low-base, the problem will only get worse in the next few years.