Last quarter, Polen’s Emerging Markets Growth team members traveled to Vietnam as part of a broader Southeast Asia road trip that also passed through Cambodia and Singapore. Despite some lingering market turbulence, the visit reaffirmed our team’s view that Vietnam appears set to remain among the most attractive investment destinations in the emerging world.
According to official data, the country’s economy grew at the fastest pace in Asia last year on the back of resilient manufacturing and a robust rebound in consumer spending, as seen below. The better-than-expected rate also marked Vietnam’s highest pace of growth in over a decade.1 In addition, the government managed to keep inflation under its 4% target at a time when other nations grappled with rampant price pressures. The list of countries that managed to grow their economies last year while maintaining inflation in check is relatively short, making Vietnam stand out.
Gross Domestic Product (GDP): Year-on-Year Growth
Source: Bloomberg. As of February 8, 2023. Data includes GDP advance estimates (preliminary results). Bloomberg forecasts were used for countries whose 2022 GDP data had not been released at the time of this writing (Japan, New Zealand, Thailand, and Australia).
Nevertheless, Vietnam’s journey is not without its bumps in the road. The country is currently facing liquidity challenges rippling through its financial system stemming from corporate bond market imbalances. The causality—as best as we can understand—is explained below.
Credit Crunch Risks
As in other parts of the world, there has been a surge of retail investor participation in Vietnam’s capital markets in recent years. What has been unique in Vietnam’s case is that the retail activity appears to have been just as elevated in the bond market as in equities. The drive for this seems to have come from the wealth advisory channels at some of the nation’s banks, which used their distribution channels to promote credit products to their clients.
In recent years, some real estate companies used this emerging credit channel to take on more and more debt. As the issuance of real estate bonds boomed, the government began to take notice and has recently made a dramatic intervention to stop the situation from spiraling out of control. With access to credit significantly limited, market participants are suddenly starting to take a hard look at these developers’ balance sheets and are worried about their solvency.
Banks have also been restricted from further direct lending to a number of real estate companies and have been curtailed from selling new corporate bonds to their clients, sparking a credit crunch as companies struggle to tap funding sources and risk defaulting on bond payments. In turn, the equity prices of several property developers fell along with their bonds, dragging the broader market lower. And with margin calls coming by the day, shares in unleveraged blue-chip companies have also been negatively impacted as investors have “thrown the baby out with the bathwater.”
What Is Next for Vietnam?
While the near-term outlook remains bumpy, our instinct is that Vietnam will muddle its way through this one way or another and that liquidity will return to markets sometime in 2023. However, it’s nearly impossible to map—or time—this out with certainty. Despite the current headwinds, it is worth noting that the International Monetary Fund (IMF) projects Vietnam’s real GDP to grow at a solid clip of 7% this year.
One thing we think is clear is that there are attractive assets on “fire sale” in Vietnam. According to our analysis, Vietnam will likely remain on a solid growth trajectory through 2023, supported by several structural tailwinds. In addition, we believe the country of nearly 100 million people is on the same growth path as China has been on with rapid rates of economic development today that mirror China’s “economic miracle” 15 to 20 years back.
Vietnam is one of the largest countries in Southeast Asia, with a population of over 90 million people. In our view, the nation offers one of the most exciting long-term growth opportunities in emerging markets today. Since 1992, the economy has averaged growth above 5%, supporting a consistent rise in per capita income levels. This has contributed to an expanding middle class, a powerful domestic consumption tailwind.
By encouraging domestic entrepreneurship and integrating into the global economy, Vietnam has almost tripled its GDP per capita level over the past 20 years, lifting more than 45 million people out of poverty. Over the past decade, the Vietnamese government has invested heavily in improving access to education. This has fostered inclusive economic growth while ensuring labor productivity remains a source of comparative advantage.
Ultimately, Vietnam boasts an economy experiencing a structural boom, yet it still has ample room to grow. Therefore, we believe that Vietnam’s underlying structural growth story remains intact despite the possibility of some bumps along the road. Either way, we would be surprised if the recent sell-off does not go down as one of the great buying opportunities for Vietnamese and emerging market investors.
1 Vietnam’s economy grew 8.02% in 2022, the fastest annual pace since 1997. Source: General Statistics Office of Vietnam (GSO) and Bloomberg.
This information is provided for illustrative purposes only. Opinions and views expressed constitute the judgment of Polen Capital as of February 2023 may involve a number of assumptions and estimates which are not guaranteed, and are subject to change without notice or update. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness or accuracy. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients. This document does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction.