This week the focus will be on one specific country, namely Vietnam. This is a booming economy driven by surging foreign direct investment (FDI) and a stock market that has finally become investible from the standpoint of foreign investors.
The benchmark Vietnam Stock Index is up 76.6% in the past 15 months and is now marginally above its 2007 peak (see following chart). Is the story peaking? Maybe in the short-term given high valuations for the leading stocks, most particularly if global markets correct again.
Still, the overall market is not so extended, trading at around 17x forecast 2018 earnings in the context of 25% forecast earnings growth. Meanwhile average daily trading volumes have been surging (see following chart) as the market has risen with the stock market capitalization now totaling US$191 billion.
FOREIGN DIRECT INVESTMENT THE CRUCIAL DRIVER
Vietnam has been by far the most successful of the economies in this region in attracting foreign direct investment in recent years.
The looming supply may be a potential negative from the standpoint of current share prices. But the critical point is that Vietnam’s capital markets are finally beginning to catch up with the dynamism of the macroeconomic story, which is all about the FDI boom and the related consumption story represented by a growing middle class. The combination makes Vietnam by some distance the best macroeconomic story at present in Southeast Asia.
The reason why is that Vietnam has been by far the most successful of the economies in this region in attracting foreign direct investment in recent years as multinationals have looked to diversify away from a total reliance on manufacturing in increasingly expensive China.
FDI inflows into Vietnam totaled US$10.1 billion in the first three quarters of 2017 or 6.8% of GDP, up from 4.9% of GDP in 2014, according to balance of payments statistics (see following chart). The dominant sector is communications technology with exports of mobile phones accounting for 21% of Vietnam’s total exports.
CONSUMPTION BOASTED BY STABLE CURRENCY AND INFLATION
This macro backdrop is driving a consumption boom, helped by a stable currency and interest rates which remain way below the levels prevailing when inflation spiked seven years ago.
The State Bank of Vietnam’s refinancing rate is now 6.25% — down from the peak rate of 15% reached in 2011 and 2008. CPI inflation was 2.66% YoY in March, compared with the 28.3% and 23% peak levels seen in 2008 and 2011, respectively (see following chart).
The banking system has also been slowly working off a NPL problem left over from a previous boom-bust cycle. The NPL problem peaked at about 25% of loans in 2012 and is now estimated at about 8% of loans, a recovery process driven partly by loan write-offs and partly by new lending.
Comments