Not all that Glitters is Gold

Rice fields of Gold and Green in Sapa, northern Vietnam

Two investment trends have taken centre stage during the season of COVID-19. The first one is Gold, an ancient asset whose appeal is set deep with the human psyche. The other is ESG, a three-letter acronym for Environmental and Social Governance, that has left the cloisters of project finance and become a mainstream ‘must-have’ for asset allocators in the Western World.

Gold is seen as a hedge against inflation, and a fear of many is that the primary monetary policy response to the COVID-19 pandemic has been money-printing in all but name, which should be inflationary in the mid-to-long term. Many investors in the UK will have been looking at ways to invest more directly in Gold to meet, or perhaps protect, their personal investment objectives. In Vietnam, as with a number of Emerging Markets, Gold is still a common store of wealth and a medium of exchange, especially when it comes to buying land or properties: sales of gold bars at Vietnam’s leading jewelry company, Phu Nhuan Jewelry Joint Stock Company (HOSE: PNJ) increased more than 20 percent compared to last year. But not all that glitters is gold.

The other ‘glitter’ has been the growing importance investment funds have placed on combining investing for financial returns with being a more impactful and responsible corporate citizen. This can be meaningful to existing investors (individuals or institutions) as well as helping attract interest from new investors, particularly those who are seeking to align their personal or corporate values with their portfolio objectives. The pressure on multinationals to reduce plastic waste, lower their reliance on fossil fuels, and be more inclusive in the workplace and society as a whole has increased steadily in the last 12-18 months. ESG is part of a broader approach of impact or responsible investing, and it is far from new.  

Investing Better 

For decades infrastructure projects have been subject to environmental impact assessments, and the related project finance instruments have been subject to key guidelines and principles, such as the Equator principles built on existing environmental and social policy frameworks established by the International Finance Corporation (part of the World Bank) and other multilateral agencies such as the Asian Development Bank. The trend to bring a wider awareness of the issues relating to sustainability to retail investor portfolios is welcome. The ‘E’ related ESG themes were marginal in the 1980s, despite increasing awareness of the threat to the Ozone hole through green-house gases: back then, if we worried much, it was more about the release of chlorofluorocarbons (CFCs) rather than the levels of carbon dioxide (C02). On the whole, few column inches were taken up with such broader ESG concerns, other than perhaps on the part of a small group of green-political thinkers. The 1990s saw more focus on recycling of paper and bottles and concerns on deforestation, and the ‘G’ in ESG got increased attention when the Cadbury Report on Corporate Governance was published, pushing for the separation of the roles of Chairman and CEO in UK listed companies.

Arguably, it wasn’t until Al Gore narrowly failed in the 2000 US presidential bid and then turned his attention to climate change, culminating in the 2006 release of ‘An Inconvenient Truth’, that awareness increased. The film and its associated images of Polar Bears stranded on melting blocks of ice, nudged more mainstream thinkers, voters, and influencers, to think long and hard about the world they wanted to leave behind for the grandkids. Then came Blue Planet, and the shocking episode in its sequel, Blue Planet II, when the world saw the prevalence of plastic waste in the oceans through the eyes and soft, authoritative words of Sir David Attenborough. ‘Woke’ was added to the dictionary in 2017, the same year that Blue Planet II was released. Greta Thunberg finally tipped the balance in late 2018. By mid-2019, more investors and entrepreneurs alike were embracing ways to reduce plastic waste, embrace the circular economy, and re-orient their thinking and investing style to accommodate sustainability. The EU has now produced rules on reporting (a reference to the EU Taxonomy on climate change mitigation will become mandatory in annual reports in 2021), and so investors can be sure the themes of ESG are front-and-centre at the mind of fund managers, institutional investors, and allocators of capital.

Enter the Coronavirus

Although the emergence of the COVID-19 pandemic initially pushed concerns on plastic waste to one side in the early phase of the pandemic, as people needed throwaway items en masse, from wet-wipes to takeaway food containers and lots more plastic bags, there is now, rightly, residual concern on the impact of billions of discarded surgical face-masks.

COVID-19 has also emphasized the importance of ESG investing in helping shape positive outcomes, not least within developing countries. In Vietnam’s case, it also has highlighted the role social responsibility has played in the country’s effective handling of the crisis compared to other nations around the world. Active investors, such as Vietnam Holding, can do their part. We are engaged with our portfolio companies in many ways, in respect of each of the dimensions of ESG and will continue to do our part in helping them navigate through the next norm whilst also exploring opportunities with other budding businesses that, in our view, are purpose-driven and well-positioned for sustainable growth.  

Vietnam did a fantastic job in containing the outbreak of coronavirus initially up until the last week of July, when it had less than 500 cases, zero deaths, and had gone 99 days without any new community-spread cases. Clearly, the recent emergence of new COVID-19 cases in Da Nang, a popular tourist destination in central Vietnam, surprised everyone. There have now been 30 deaths and slightly more than 1000 cases. Whilst these figures remain minimal compared to the rest of the world, the economic impact has been dramatic. Some of the cases were imported and, of course, quarantined upon arrival, but most were transmitted throughout the community, largely in Da Nang and Hoi An. Da Nang was immediately put under strict lockdown and is expected to exit the lockdown today (4th September).

After having enjoyed a comeback from the initial shutdown, Vietnam’s usual booming tourism business is now halted. Vietnam Airlines, the national flag carrier, plans to halve salaries for pilots and flight attendants, for example and is looking to sell several planes amidst projections of US$650m in losses for the year.

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Vietnam’s tourism sector was hit by a second outbreak of Coronavirus on 24th July in Danang (above) but its stock market has rebounded 11% in August

However, despite some anxiety over further spread during the next few weeks, there are glimmers of positive news.

Retail figures, particularly for online sales, show that consumer spending is increasingly optimistic. The stock market rose by more than 11% in August, and Vietnam’s trade surplus has risen to US$12bn in the first eight months of 2020, more than double the amount in the same period in 2019, providing further strength to the foreign reserves and economy as a whole.

The Vietnamese aviation authorities have prepared detailed plans for resuming commercial flights to some Northeast and Southeast Asian destinations this month. Mandatory quarantine periods have also been waived for approved business and other official visitors on trips of less than 14 days in duration.

Let’s also not forget the country’s relatively quick recovery following the national shutdown in March. If the government’s handling can continue to ensure public confidence as it did before with closed borders, testing, tracking and tracing, hotspot isolating, and caring for patients, then tourism and domestic spending are likely to bounce back again. In the end, Vietnam’s battle against COVID-19 boils down to its people pulling together, taking ownership, and making it their duty to follow the government’s guidelines and rally against the virus as a matter of national security. In the long run, we believe businesses with sustainable strategies will benefit from this type of spirit and domestic consumer behavior.

So, although Gold may remain as an attractive investment opportunity for investors at this time, including the domestic investors among Vietnam’s 100 million population, the true gold may lie hidden in the equity markets. The country has decades of multi-generational growth ahead of it, and through active-managers, it is possible to search out investment opportunities that tread gently with respect to the environment, make sustainable compounding returns and contribute to society as a whole.

In the same way that Gold is a tool for diversification, so is selecting geographies to invest in that may not be so familiar. Although buying ETFs may, on the surface, appear to be an easy way to get quality diversification, or buying into a large global fund that might have some exposure to a market of interest, another more strategic way is to buy directly into a single-country fund. Vietnam is a rapidly growing market and is gaining an increasing following amongst investors. Despite its own stock markets being less than two decades old, there are three country funds that are listed on the London Stock Exchange. Vietnam Holding (LSE: VNH) is perhaps the nimblest. It is a focussed portfolio of cUS$130 million in assets, with a strong pedigree in responsible investing.

Vietnam Holding has been a signatory of the United Nation’s Principles for Responsible Investment (PRI) for over a decade and has always considered environmental, social, and governance (ESG) as an integral part of its investment process, which is why we were proud to receive the PRI assessment of A, A* and A last month. These scores prove the Fund’s commitment to responsible investing, and the long-term outperformance against the indices and ETFs show that there is value in investing in an actively managed fund. Later this year Vietnam will become the largest constituent of the MSCI Frontier Market, and perhaps in a few years part of the MSCI Emerging Market Index. It may be a good time to explore the opportunity now, take the road less traveled, but do so with a purposeful aim of Investing Better.

Parts of this article first appeared in UK Investor Magazine. The author, Craig Martin, is Chairman and Managing Director of Dynam Capital, a Guernsey regulated fund manager. Dynam is the manager for Vietnam Holding (LSE: VNH) a main-board London listed closed-end fund focussed exclusively on investing in equities in Vietnam. Dynam has an experienced team of 12 people on the ground in Vietnam. See www.vietnamholding.com and http://www.dynamcapital.com for more information.

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.

Defeating Covid-19 in 90 days

Defeating Covid-19 was the Nation’s priority

Much has been written elsewhere about how Vietnam defeated Covid-19’s initial waves in 90 days. In a country of close to 100 million people, it is remarkable that there have been no confirmed deaths. As UK Prime Minister Johnson said, “the virus thrives on ambivalence”, and perhaps that is why this country was able to succeed where so many others have succumbed. A combination of quick action: closing borders, imposing quarantine and military efficiency and effective communication: TikTok videos, traditional media and propaganda posters (above) helped pull the nation’s actions into a cohesive plan. The country’s lockdown in April was relatively short, less than three weeks, and then the hard-working nation got back to work.

No new community spread cases in the last 90 days

Travel Travails

Vietnam’s borders remain pretty much closed to tourists and non-essential travel. Arrivals must undergo two weeks quarantine, currently in state facilities, but soon possibly in swanky hotels. This is a sensible approach to protect the 90 day record of no community-spread cases of Covid-19. Although the international tourism market will suffer as a result – probably until next year – the domestic tourism market is getting a boost. Popular destinations like Hoi An, and the coastal resorts, will no doubt be even more charming without the swarms of North Asian tourists in their pineapple-print shirts and matching shorts. The airline industry has been hit hard and National Carrier Vietnam Airlines is seeking government help to the tune of about US$ 500m.

Some Motherwell’s Son

One of Vietnam Airlines’ pilots, a Brit from Lanarkshire, Scotland – an ardent Motherwell supporter – has a lot to thank Vietnam for. He was an unfortunate carrier of more than passengers in April, and brought Covid-19 to a popular expat bar in Ho Chi Minh City’s District 2. He became very sick, and his lungs became like sacks of cement, putting him at death’s door, and with a real-chance of being Vietnam’s only Covid-19 fatality. He spent close to 100 days in an ICU in Ho Chi Minh City, and received excellent healthcare. Several Vietnamese people even offered to be lung-transplant donors to save the life of the British pilot. Thankfully, he made a full recovery, and is safely back in Scotland. It appears that his local football club is seeking a new sponsor for the next season, maybe Vietnam Airlines can be allowed to use some of its subsidy to get its name on the jersey of its newest fan. The pilot said that he would have died, had he been anywhere other than Vietnam.

Viva 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 within five years.

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.

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Vietnam: post-pandemic winner

Vietnam is in many ways a Confucian ‘East-Asian’ society, with strong community values, and an 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 400 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 which created a cluster of infections around 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.

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.

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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