Tiger in the Making II — The structural growth story is intact

Vietnam Country Outlook — Tiger in the Making II

What’s new?
► COVID-19 and the US-China trade war have created a demand shock.

► But demographics, urbanization, and increased wealth are incredibly strong long-term drivers.

► FDI has fallen YTD, but will recover to new heights as manufacturers seek diversification from China.

► But… Emerging markets Index inclusion is still probably a few years away.

Market outlook
► Vietnam remains an attractive investment destination.
► The VNI has rallied 34% since the panic in March to just under 900 despite persistent foreign net selling.
► Our 2020 VNI target: 1000 points. But stock selection is crucial in Vietnam.
► Investors should focus on quality companies and think long term rather than trying to time the market.

Structural growth story is intact
The key thematic drivers of the Vietnam investment opportunity are still in place, in our view. Our 2019 report titled “A Tiger in the Making” presented four broad themes that support a highly positive long-term country outlook. But this was long before COVID-19 and the resulting economic shutdowns and political fallout sent the global economy—and possibly globalization itself—into a metaphorical ditch.

Investors are now wondering if the structural fundamentals have shifted. In our view, they have not. Of course, the short term global and regional impact negative, but Vietnam is one of the few national that is still likely to post positive GDP growth in 2020. We also expect a sharper-than-average recovery in 2021E. This is after revisiting the four key arguments of our thesis to determine whether they remain valid:

1) Surging foreign direct investment to transform Vietnam into the world’s next manufacturing export powerhouse. Despite a YTD decline in FDI, we believe that COVID actually supports this story given Vietnam’s successful response and the wider geopolitical fallout.
2) Multi-decade demographic dividend from Vietnam’s young, well-educated,
and dynamic population. No change here – demographic momentum is incredibly powerful and not easy to shift.
3) Rapid urbanization and middle class growth. COVID has been a setback for wealth creation, but this is temporary rather than structural.
4) MSCI Emerging Markets Index inclusion may require patience. Limits on foreign ownership remain the core issue, not the disease or geopolitics. Although foreign investors have been persistent net sellers, we think this will reverse given the country’s strong growth outlook.

We remain bulls on Vietnam and continue to view it as an attractive long-term investment opportunity. However, stock selection is key, as ultimately high-quality companies tend to outperform the overall market. This is especially true in 2020 given the extremely limited visibility on global macroeconomic outcomes. Thus, we recommend focusing on stocks with strong balance sheets, high-quality management teams, solid cash flow, and preferably a domestic focus.

Our top picks are VCB, VHM, KDH, and HCM – all of which are easy for foreign investors to buy and hold. Several other names are outside our official coverage universe but also tick the “quality” box, including VNM, HPG, and FPT.