Vietnam Growth Story Intact – AFC on the Road – Vietnam January/February 2024

Dear Investors and Newsletter Readers,

Ruchir Desai, Co-Fund Manager of the AFC Asia Frontier Fund, travelled to Hanoi in January 2024 and Ho Chi Minh City in February 2024 to attend investor conferences and meet with portfolio companies.

Though Vietnam is one of the better long-term structural stories within the frontier and emerging market universe, it is fair to say that its economy and stock market have had a challenging time in 2022 and 2023. Hence, it was good to be on the ground at the start of the year to get a feel for how the economy is doing and whether investor sentiment has improved since my last visit in 2023.

In 2022, like many other economies in the world, Vietnam was negatively hit by the aggressive interest rate hikes by the U.S. Fed, which led the State Bank of Vietnam to increase its benchmark interest rates by 200 basis points within a span of two months – a significant negative shock for the stock market sentiment in the country.

Furthermore, the government’s crackdown on the corporate bond and real estate sectors in the same year did not help matters. The regulatory oversight of the corporate bond and real estate sectors is part of a larger anti-corruption drive by the government that has ensnared individuals from both the private and public sectors, and this has also been an overhang on domestic investor sentiment in the last two years.

Earlier this week, the country’s President had to tender his resignation, most likely due to the ongoing government crackdown on corruption. This only shows how deep and serious the anti-corruption crackdown is this time in Vietnam.

However, the position of the President is largely ceremonial, and we do not believe this will impact the investment case for Vietnam as the government realises the importance of long-term economic growth backed by exports, the manufacturing sector, and domestic consumption.

Therefore, we are not worried that the Vietnamese government will rock the boat so hard that it will hurt the long term economic development of the country.

Like All Central Banks Globally, the State Bank of Vietnam Raised Interest Rates Aggressively in 2022 – this was Negative for Investor Sentiment

With higher interest rates starting to soften consumption and consumer sentiment in its largest export market (the U.S.), Vietnam’s exports also weakened in 2023. It is important to put in perspective how critical exports and trade are to Vietnam’s economy. Total exports and total trade are close to 100% and 200% of GDP, respectively, and thus, any major softness in global trade and exports will have a negative effect on Vietnam’s economy, which will trickle down to employment, wages, and consumer demand.

Vietnam Exports were Weak in 2023 Led by a Decline in Exports to the U.S. (in USD bn)

Hence in 2023, with the process of higher interest rates still playing out and exports being weak, Vietnam reported GDP growth of 5.1%, which is the lowest it has reported since 2012 (barring the pandemic years of 2020 and 2021, when GDP growth was negatively impacted).

Vietnam’s GDP Growth in 2023 was Below its Long-Term Trend

Having said that, the last two years have not only been about negative events; Vietnam is by far the key beneficiary in Asia from the global supply chain shift that has only accelerated post-pandemic. Despite slower global economic growth and higher interest rates, foreign direct investments (FDI) into Vietnam have been very strong and consistent, with 2023 seeing the highest ever inflows.

As a % of GDP, FDI into Vietnam is also amongst the highest in the region which is proof of the manufacturing prowess the country has built up over the past decade.

FDI Flows into Vietnam have been Consistent as the Country is the Key Beneficiary in Asia from the Global Supply Chain Shift

With trade and geopolitical tensions between China and the U.S. not expected to ease any time soon, we foresee that Vietnam will continue to attract manufacturing-related FDI as it offers a large and disciplined workforce at a lower cost to China, it has access to a large number of free trade agreements, and more importantly, it has a built up a strong eco-system in the manufacturing sector which would likely take time for any other countries in the region to replicate.

Furthermore, with Vietnam building deeper relations with the U.S., it will not be surprising to see Vietnam move up the technological value chain in the long term with respect to the types of products and goods it can produce and export. If Vietnam can move up the manufacturing value chain, this will be very positive for its economic productivity which can help sustain strong long-term GDP growth.

More Strategic Relations between Vietnam and U.S. Could Enable Vietnam to Move up the Manufacturing Value Chain

At the investor conference in Hanoi, I met with a few of the fund’s portfolio companies, but the key highlight of the trip was the site visit organised to Vinfast’s EV (electric vehicle) manufacturing plant in Hai Phong which is about a two-hour drive from Hanoi.

Vinfast is a subsidiary of Vingroup, which is the largest conglomerate in Vietnam, with interests in real estate, malls, hospitality and now EVs. Vinfast has very ambitious plans and besides assembling EVs in Vietnam, it is also setting up EV assembly plants in the U.S., India, and Indonesia. The company has long-term plans to sell its EVs in various international markets and has launched various EV models in the recent past.

The tour of the Vinfast EV facility was very impressive with a majority of the manufacturing process being automated with little human involvement. Understandably, we were not able to take pictures inside the manufacturing facility.

The AFC Asia Frontier Fund has currently no holdings in Vinfast, Vingroup or any of Vingroup’s listed subsidiaries.

The Vinfast VF9 at the Vinfast Factory in Hai Phong

I also attended another investor conference in Ho Chi Minh City in February and met with some of our other portfolio holdings. During this trip, we visited various types of modern retail stores like consumer electronics, groceries, and jewellery.

From these store visits the company that stood out for me was Phu Nhuan Jewellery (PNJ) which is our top consumer pick in Vietnam. PNJ is, in my view, the leading jewellery chain operator in Vietnam and is one of the very few listed consumer companies in Vietnam that has shown strong execution of its strategy. This has resulted in a powerful brand, increasing market share and relatively good financial results in the past few quarters despite a weak consumption environment.

With gold jewellery consumption per capita in Vietnam still below China and India, PNJ is a good proxy for Vietnam’s rising long-term disposable incomes which is backed by PNJ’s ability to build a strong brand and offer innovative products, which is key in this industry.

A PNJ Store in Ho Chi Minh City

Inside the PNJ Store

I mentioned earlier in the report that Vietnam had a relatively challenging 2022 and 2023. However, we believe Vietnam has solid macroeconomic indicators like a stable currency, current account surplus, and rising foreign direct investments. As a result, bottom-up stock selection has been the key for us in Vietnam over the past few years as there are various companies that are still performing well despite weaker investor sentiment. The graph below shows AFC Asia Frontier Fund's our top picks and largest holdings in Vietnam.

Most of these names have outperformed the VN-Index over the past year because of their strong business models and differentiating factors in their respective industries. We follow this approach in picking quality long-term winners not only in Vietnam but across the universe of our AFC Asia Frontier Fund.

The AFC Asia Frontier Fund’s Top Picks in Vietnam Have Performed Well

The key takeaways from being on the ground in Hanoi and Ho Chi Minh City were that both corporates and investors felt the worst was behind them and were much more optimistic for the year ahead compared to my visits to these same investor conferences a year ago.

The important factors are in place for Vietnam to return to a sustained period of GDP growth of 6% or more: rising exports due to the global supply chain shift, improving infrastructure, increasing tourism, a large domestic consumer base, and long-term political stability.

I am not deeply concerned with the speed bumps Vietnam has faced in the last few years as its long-term trajectory is in the right direction and the AFC Asia Frontier Fund has allocated to Vietnamese companies that are exposed to important parts of the economy like consumption, financial services, ports, and technology. We believe these sectors are very good proxies for Vietnam’s structural growth story.

The current weight of Vietnam in the AFC Asia Frontier Fund is 14.1% and is the fund’s second largest country exposure as of 29^th February 2024.

For further information on our AFC Asia Frontier Fund, please find below the links to the latest factsheets, presentation, and special edition newsletter:

• • Factsheet AFC Asia Frontier Fund - (Login required)
  • Presentation AFC Asia Frontier Fund (English) - (Login required)
  • Presentation AFC Asia Frontier Fund (繁體中文) - (Login required)
  • Presentation AFC Asia Frontier Fund (简体中文) - (Login required)
• Positive Triggers Align for Strong Rally to Continue in 2024 - AFC Asia Frontier Fund 2023 Review and Outlook for 2024

If you are interested in our stand-alone AFC Vietnam Fund, below are the links to the latest factsheet and investor presentation. Please note that the AFC Vietnam Fund is not available to "U.S.-Persons". 

• • Factsheet AFC Vietnam Fund - (Login required)
  • Presentation AFC Vietnam Fund (English) - (Login required)

I hope you have enjoyed reading our "AFC on the Road" report. If you would like any further information about our funds, please get in touch with me or my colleagues.

With kind regards,

Ruchir Desai
Co-Fund Manager

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