By Emerald Yau, Head of Equity Index Product Management, Asia
Which less-explored market has been delivering stellar equity performances in recent years, performances on par with or better than those of global equities, developed market equities, emerging market equities, and frontier market equities?
What market represents one of the few countries in the world to have posted positive growth in 2020 amidst the COVID-19 pandemic? It’s a country market that is also a well-positioned manufacturing hub ready to benefit from supply chain relocations due to US-China trade tensions, and boasting cheaper labor costs. It enjoys substantial road, airport and seaport transportation infrastructure, all of which is being rapidly upgraded to cater for increasing export demand. And it’s a market that is also currently on FTSE Russell’s watchlist as under consideration for advancement from frontier to secondary emerging market status.
The country we’re talking about is Vietnam.
Vietnam’s economic development and industrialization over recent decades have been remarkable. Economic and political reforms have propelled the country forward, transforming what was once one of the world’s poorest nations into what is today a solidly lower middle-income one.
In recent years, multinationals looking to diversify their manufacturing bases and relocate their supply chains have been attracted to Vietnam because of its cheaper labor costs and improving infrastructure. Companies such as Samsung and Apple supplier Foxconn have both recently announced plans to expand production in Vietnam.
This increasing foreign direct investment also brings new wealth to the local population. According to World Bank estimates, 26% of Vietnam’s population is expected to make up the country’s emerging middle class by 2026, up from the current 13%. Both these factors could lift consumption and real estate demand, the two areas with the most exposure in FTSE Russell’s Vietnam indices.
Some investors may be surprised to learn that the Vietnam market has in fact delivered better or similar in terms of per risk return by comparison with overall frontier equities, emerging market equities, development market equities, and global equities over the longer term. Vietnam equities have performed strongly, delivering a 5-year cumulative return in US dollar terms of over 120%. During the same period, global stocks only delivered a 96% total return on a cumulative basis.
It is true that Vietnam stock valuations have been edging higher. However, they remain reasonable compared to those of many neighboring emerging Asian countries – for example, those of Thailand (over 40x) and Malaysia (over 25x).
While volatility is also higher in the Vietnam market – not unexpected given the market’s frontier nature – the low correlation of Vietnam equities with emerging, developed, and global equities could provide diversification benefits to investors already holding a global portfolio.
In 2020, FTSE Russell entered into partnership with Singapore Exchange to develop a comprehensive Asian and Emerging Markets focused, multi-asset index derivatives offering. Since then, the Singapore Exchange has launched multiple index futures based on FTSE Russell indices, including two Vietnam equity index futures. These index futures have made it easier for investors to manage the risk associated with Vietnam equities.
The two index futures, together with a newly launched ETF benchmarking the FTSE Vietnam 30 Index, have created an ecosystem that now gives international investors an efficient way of accessing or hedging this market.
In addition, Vietnam is currently on FTSE Russell’s watchlist for reclassification from frontier to secondary emerging market status. Before this happens, though, the country will need to implement a true delivery versus payment (DvP) settlement mechanism and address issues such as foreign ownership limits. See our March 2021 Country Classification Review for more details.
When looking to capitalize on the macro trends driving Vietnam’s future, investors should be aware of certain risks, particularly as Vietnam is still a frontier market for now.
Firstly, Vietnam regulates the foreign ownership limits for Vietnam-based companies. While this is taken into account in FTSE Russell’s Vietnam indexes, the limitations could constrain the growth capacity of the Vietnam market, and restrict international investors’ access to the most popular companies once the ownership limits on such companies are reached.
Secondly, domestic investors have been piling into Vietnam stocks as deposit rates edge lower. Foreign investors are also increasingly tapping Vietnam opportunities. The recent surge in trading volumes on the Ho Chi Minh Stock Exchange has caused order overload issues for Vietnam’s main bourse.
The exchange has been working towards a system upgrade resolution which is expected to be ready later this year. Despite concerns associated with this overload, risk-tolerant foreign investors have not stopped engaging in a long-term investment strategy that gives them exposure to this rapidly growing economy.
Vietnam offers a compelling growth story. With an export-oriented economy that is likely to benefit directly from global recovery from the pandemic, the Vietnam market seems poised to continue its rise from the frontier horizon in the years ahead.
 Based on 5-year daily total return data in US dollar terms.
 Refers to FTSE Frontier Large Mid Cap Vietnam Index and FTSE All-World Index, respectively; return data as of April 30, 2021.
 CEIC data; as of May 2021.
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