1. Pho-nomenal Vietnam

    Second Quarter 2017
  2. Looking at Asia today, one country stands out as being among the best structural growth stories of the coming decades, Vietnam. We believe investors should be paying close attention to this increasingly vibrant economy. Some of Vietnam’s many drivers are summarised overleaf but we believe the most important are the country’s transition towards becoming Asia’s leading low-end manufacturing exporter, the opening up of the economy and the increasing number of interesting investment opportunities.
  3.  

     

     

     

     

     

  4. Export titan in the making

    Vietnam’s success in leveraging its positive attributes has resulted in an internationally competitive export manufacturing base, which is perhaps the most important driver for the country.

    Why? Because exports matter. A lot. No emerging country of significant size has truly ‘emerged’ without building up a successful manufacturing export base to fund its domestic growth (e.g. South Korea, Taiwan, Hong Kong, Singapore and China). Today, Vietnam’s export growth is exploding upwards as it becomes the destination of choice for firms such as Samsung and Hyundai to set up new manufacturing plants. The scale and success of Vietnam’s export juggernaut is clearly evident in the chart below. Where nearly all emerging countries have struggled to grow exports over the past decade (emerging markets exports on average having declined for the past several years), Vietnam is almost unique, with export growth surging.

    Crucially, Vietnam’s export boom should continue for decades, driven by China relinquishing market share in traditional light manufacturing categories as it transitions up the manufacturing value chain and rebalances its economy. As shown in the chart overleaf, China is still in the very early stages of this process, and with total manufacturing exports of around US$2 trillion a year, compared to Vietnam’s total exports of US$169 billion, the opportunity is huge and should support strong domestic growth in Vietnam for many years.

     

    Export index*

    Source: EM Advisors Group.
    *Y axis = Export Index (USD, 2007-10 = 100, 3mma).

     

    China Low-end Market Share (G3 Industrial Imports)


    Source: EM Advisors Group.

     

  5. Opportunities to invest

    Despite the promising outlook, one of the most striking and appealing aspects of Vietnam is its cheap equity market. Visit the country today and it is easy to find quality companies growing earnings in the region of 20% p.a. but trading on lowly P/E multiples of around 12x. Compare this to the rest of Asia, as per the diagram below, and Vietnam is anomalously cheap.

     

    2017 PER/EPS Growth

    Source: Bloomberg PERs. Credit Suisse forward EPS growth, Dragon Capital.

     

    There are reasons for some of these subdued valuations. In particular, market liquidity is low, foreign ownership limits can make it difficult to purchase companies and Vietnam is not in any significant global indices. However, things are quickly changing with efforts to open up the market accelerating. This year, the country’s two stock markets are merging, derivatives trading will commence and an increasing number of State Owned Enterprises will be privatised and listed. Most importantly, there are promising signs that the foreign ownership rules will be relaxed, with limits in banks already raised and developments in motion to dramatically increase foreign ownership levels across the market. Such enhancements should speed the country’s ascent to MSCI emerging market status and be very positive for the stock market.

    Military Bank is one of our largest Vietnamese holdings, and a direct beneficiary of Vietnam’s improving economic outlook. The private sector credit cycle is picking up strongly, with the bank growing loans in excess of 25% and RoEs likely to head north of 20%. With significant capital, a great deposit franchise and strong growth in consumer banking, we believe the bank is very attractively valued at a little over 1x price to book. We are also seeing a strong revival in the property market, boding well for our holding in Vingroup, the county’s dominant property developer which enjoys privileged access to state-owned land and has a rapidly expanding consumer retail business. Recently we invested in Hoa Sen and Hoa Phat, two of the country’s leading steel producers which are likely to benefit from increasing infrastructure spending but trade on just 5x price to earnings. As the market continues to open up, we are likely to see Vietnam become an ever greater portion of our Asian portfolios.

  6. As China moves up the manufacturing value chain, low-end manufacturing worth hundreds of billions, if not trillions, of dollars will become available to those countries able to seize the opportunity. With its positive demographics, cheap workforce, effective government and convenient geographic location, Vietnam is rapidly becoming the destination of choice for such manufacturing, arguably making the country the best structural growth story across the emerging markets. Combined with low valuations, a number of high quality companies and a market rapidly opening up, we believe it is among the best investment locations in emerging markets. Don’t miss Saigon.
  7. Important Information and Risk Factors

    The views expressed in this article are those of Roderick Snell and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

    This communication was produced and approved on the stated date and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

    Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford Life Limited is authorised by the Prudential Regulation Authority (PRA) and regulated by the FCA and the PRA. Baillie Gifford & Co Limited is a unit trust management company and the OEICs’ Authorised Corporate Director.

    Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.

    Persons resident or domiciled outwith the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.

    Important Information Hong Kong

    Baillie Gifford Asia (Hong Kong) Limited 百利亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 licence from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of UCITS funds to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited 百利亞洲(香港)有限公司 can be contacted at 30/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong. Telephone +852 3756 5700.

    Important Information South Korea

    Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.

    Important Information Japan

    Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.

    Important Information Australia

    This material is provided on the basis that you are a wholesale client as defined within s761G of the Corporations Act 2001 (Cth). Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth). It is exempt from the requirement to hold an Australian Financial Services License under the Corporations Act 2001 (Cth) in respect of these financial services provided to Australian wholesale clients. Baillie Gifford Overseas Limited is authorised and regulated by the Financial Conduct Authority under UK laws which differ from those applicable in Australia.

    Important Information South Africa

    Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.

    Important Information Canada

    Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005. It is the legal entity through which Baillie Gifford Overseas Limited provides some marketing functions in Canada.

    Potential for Profit and Loss

    All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.

    Stock Examples

    Any stock examples and images used in this article are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.

    This article contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.

    All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.

    The images used in this article are for illustrative purposes only.

     

    Ref: 32734 INS AR 0352

  8. Roderick Snell

    Investment Manager
    Roddy graduated BSc Biological Sciences with Honours Medical Biology from the University of Edinburgh in 2006. He joined Baillie Gifford in the same year and worked in the UK and European Equity Teams before joining the Emerging Markets Equities Team where he is an Investment Manager. Roddy has managed the Baillie Gifford Pacific Fund since 2010.