Vietnam’s transformation into a thriving investment hotspot is driven by political stability, evolving supply chains, property recovery, banking resilience, and structural tailwinds as this analysis from Ng Xin-Yao, an Investment Manager for abrdn Asia Focus plc, highlights:
It is an uncomfortable fact that many people’s default notions of Vietnam are still firmly rooted in the mayhem of what was arguably the ultimate proxy war between America and the Soviet Union. This year marks the 50th anniversary of that conflict’s end.
By any standard, to say Vietnam has come a long way during the half-century since the US’s epoch-defining retreat from Saigon would be an understatement. It has in many respects been transformed.
Strictly speaking, the country remains classified as a frontier market – one rung below an emerging market (EM). But it has been on the cusp of an upgrade for some time[1], and informed investors are increasingly recognising its appeal.
According to a study published last year by global credit rating agency S&P, EMs are set to comprehensively outstrip their developed counterparts in terms of GDP growth over the next decade. Vietnam is expected to spearhead the charge, growing even more rapidly than India – which by 2035 is likely to be the world’s third-largest economy[2].
So how might this journey unfold? Here are five key drivers that are likely to help cement Vietnam’s fast-burgeoning status as an investment hotspot.
- Greater political stability
Vietnam is a single-party socialist republic. Government is the responsibility of the so-called “four pillars” – the General Secretary, the President, the Prime Minister and the Chairman of the National Assembly.
Of these, the General Secretary has the most power. Since last year the position has been occupied by Tô Lâm, who is viewed as more economically pragmatic than his predecessor, Nguyễn Phú Trọng, who held office for 13 years.
Both the Prime Minister and the Chairman of the National Assembly are aligned with Lâm, while the President’s role is essentially ceremonial. As a result, the likelihood of political upheaval in the near future appears low.
- Evolving supply chains
With China still struggling to shake off its post-pandemic woes and now facing renewed US threats of swingeing tariffs, Asia’s integration into global supply chains continues to evolve. Vietnam is among the principal beneficiaries of this ongoing shift.
The adoption of “China plus one” and “China plus two” approaches to outsourcing has helped boost Vietnamese exports. Ties with the US have developed especially rapidly, not least in technology-related sectors.
Launched last year, the National Semiconductor Industry Strategy serves as a compelling illustration of Vietnam’s ambitions. One of its short-term aims is to secure a 10% share of the worldwide semiconductor market by 2030[3].
- A recovery in the property sector
As China has shown, an unhappy real estate market can have far-reaching investment consequences. Shrinking sales of homes during the COVID-19 pandemic laid the foundations for Vietnam’s own real estate crisis.
Thankfully, there are signs that the worst may have passed. By enhancing transparency around transactions, new laws clarifying regulations on issues such as land use and valuation have brought a semblance of a return to normality.
Demand for property still far exceeds constrained supply, most notably in the mass market. Nonetheless, higher-quality real estate companies look well placed to profit if and when a recovery finally takes off.
- A banking bounce-back
The parlous state of the property market contributed to a torrid 2023 for Vietnam’s banking sector. Inflationary pressures and a generally uncertain global backdrop added to the fray, leading to compressed interest margins and a rise in non-performing loans (NPLs).
However, here, too, there is mounting evidence that the picture is becoming more settled. On the strength of our own discussions with banks, we expect to see interest margins stabilise and NPLs trend down.
An important point from an investment perspective is that the performance of individual Vietnamese banks tends to vary substantially. This offers scope to beat the broader market through diligent stock selection.
- Structural tailwinds
Vietnam has a number of long-term demographic trends in its favour. The same can be said of numerous developing economies in the region.
One dynamic likely to prove highly significant over time is an improvement in education levels. This should allow businesses in arenas such as technology and engineering to leverage a skilled but relatively cheap workforce.
In tandem, income and wealth are likely to grow. This will fuel domestic consumption, benefiting a range of sectors and further expanding the opportunity set for investors – particularly among the smaller companies in which a fund such as ours specialises.
Ng Xin-Yao is an Investment Manager for abrdn Asia Focus plc.
[1] See, for example, London Stock Exchange Group: “FTSE classification of equity markets – FTSE equity country classification”, October 8 2024 – https://www.lseg.com/content/dam/ftse-russell/en_us/documents/country-classification/ftse-country-classification-update-2024.pdf.
[2] See, for example, S&P Global: Look Forward – Emerging Markets: A Decisive Decade, October 2024 – https://www.spglobal.com/content/dam/spglobal/global-assets/en/special-reports/look-forward/volume-7/Corp_1015_LookForwardEmergingMarkets.pdf.
[3] See, for example, Vietnam Economic Times: “Vietnam unveils semiconductor industry development strategy”, September 23 2024 – https://en.vneconomy.vn/vietnam-unveils-semiconductor-industry-development-strategy.htm.
