China decoupling is a Vietnam opportunity.

Well, the world is challenging right now. The complete list seems quite biblical.

It can seem uncouth to look for opportunities at a time like this, but that's not just our job. It's your job too, as an expat and investor. For your career, company and family wealth.

China decoupling is heating up and Vietnam looks like a beneficiary. So we've decided to do a small series of posts.

• First up is this post; a higher level view at whether decoupling is real, why Vietnam is well placed for direct investment, and how to invest in the Vietnam story.

• Next we will talk to an old entrepreneur friend from our China days who has been based in Ho Chi Minh city for the last few years on what life is like on the ground.

• Finally we will talk to a corporate structuring expert in Ho Chi Minh. That's because if we have learned anything from our China time, is that you've got to learn how the government licensing game works if you hope to win.

But first up, is decoupling for real? Why is Vietnam well placed? How to invest in the Vietnam story from the safety of home.

Is decoupling for real?

Initially it seemed that China decoupling was an empty buzzword. Then it seemed a temporary early COVID thing. Still now, we see businesspeople claiming that “things will return to normal soon”. That seems either hopelessly naïve, brave or a necessary optimism to avoid mental self-harm. Corporate Stockholm syndrome perhaps?

Consider this rapidly expanding list of examples that is by no means comprehensive.

• China’s zero COVID policy is causing chaos and manufacturers to manage risk.

• HBR estimates that the Chinese government will spend $500 billion USD by 2025 “to support indigenous technologies and products.”

• The US government is restricting chip sales to China and is investigating Tiktok.

• Google Translate exits China, adding to a long list of tech departures.

• Apple is rapidly expanding production in India and Vietnam.

(Source: Bloomberg)

The Vietnam opportunity

#1 Labor availability - A Young Country.

Finding workers is a big concern globally these days, even in China. China’s working age population is declining as the birth rate has fallen to just 1.18. Vietnam by contrast is still at 2.05 which is very close to replacement level of 2.1. The figures below are for Vietnam.

By contrast the figure for the 0-14 age group in China is just 17% and still declining.

#2 Labor Cost Advantage

Looking at the official unemployment rate of 2% you might think availability and cost inflation would be higher. But it is worth understanding that that many are starvation level jobs are listed as employment.

Thus monthly wages for manufacturing workers are about $150 per month, and availability is good, which is well below the rate possible in China.

#3 The Migration of Supply Chains has Begun.

Moving manufacturing without supply chains being available is hard. The supply chains in China are, so far, much deeper than Vietnam. However as FDI increases in the South East Asian region, this is rapidly changing.

Exports from Vietnam are growing very fast, effectively doubling from 2018 to 2021 as the figure below shows. To be sure, it's still small compared to China, but all observers expect quick growth to continue.

It is interesting that higher value goods like machinery (46%) and electronics (23%) are growing at higher rates than sectors traditionally associated with low wage countries like textiles (15%) and footwear (18%).

This might mean that growth and investment in these sectors are going more towards even lower wage locations like Bangladesh.

#4 Vietnam’s Trade Agreements - Everyone's Friend.

Vietnam has one of the largest numbers of free trade agreements and with a wide variety of countries. Doing a deal with India, China, the EU, the US and all regional neighbors isn't as common as you might think.

• ASEAN Free Trade Area (AFTA)

• ASEAN–Australia–New Zealand Free Trade Area (AANZFTA)

• ASEAN–China Free Trade Area (ACFTA) - 2010,

• ASEAN–India Free Trade Area (AIFTA) - 2010,

• ASEAN–Japan Comprehensive Economic Partnership (AJCEP) - 2010.

• ASEAN–Korea Free Trade Area (AKFTA) - 2010.

• Comprehensive Economic Partnership for East Asia

• Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

• European Union-Vietnam Free Trade Agreement (EVFTA).

• Vietnam-Chile Free Trade Agreement (VCFTA) - 2014.

• Vietnam-Korea Free Trade Agreement (VKFTA) - 2015.

• Japan-Vietnam Economic Partnership Agreement - 2009.

• The U.S.-Vietnam Bilateral Trade Agreement (BTA) - 2001.

The chances are good that no matter where you are exporting, you'll be getting good access and low border duties. Worth checking the details for your product though.

The Portfolio Investor’s Guide

In emerging markets (and most markets for that matter) we don’t think investors should be picking individual stocks. Far better to Invest via an exchange traded fund (ETF) that tracks the Vietnam stock market.

Using ETFs gives diversification which lowers risk yet can give great returns when an economy and business environment performs. Some emerging markets have several ETFs but for Vietnam there is just one – the Van Eck Vietnam ETF (VNM).

• Expense Ratio: 0.59%

• Annual Dividend Yield: 0.34%

• Assets Under Management: $381.1 million

That expense ratio would be on the high side for a developed country, but is more normal in a frontier country like Vietnam. For a smaller emerging market, the assets under management is also fairly acceptable. Do avoid funds with AUM under $50 million.

Bull Case - Strong Economic Growth and Lowish Inflation.

Do we need to explain that Vietnam is growing fast? Probably not. But the recent performance in the last quarter or two has been particularly impressive.

Vietnam is bucking the global doom and gloom. All that diverted foreign direct investment from China might be to thank.

In fact, the expectation is that growth will exceed 8% in 2022, which is well ahead of the 6% forecast by most experts. Not only that, but growth continues to accelerate and achieved 13.67% growth in Q3 2021 as the table further below shows.

Economic Growth has Surged Lately.

(Source: Trading Economics)

With such strong growth plus an exposure to imported energy you might expect inflation to be similar to the 8-10% range seen in developed countries like the United States and Europe. Yet inflation in Vietnam has remained impressively constrained at just 4%.

Inflation has only edged up to 4%.

(Source: Trading Economics)

Decent rice harvests and moderate food price inflation are partly to thank.

Bear Case – The Market is volatile and currently falling.

Now the bad news. Vietnam’s stock market doesn’t follow the country’s economic trajectory. The stock market has been far more volatile.

Here is the 5 year track record for the Van Eck Vietnam ETF. It has lost money over 5 years but a 45% plunge so far in 2022 has dragged returns into the negative.

In some ways, that’s good news. Cheaper means better entry point, right? At some point it is highly likely that today’s price will look like a good time to buy. Risk off sentiment around the world as well as a bank run and corporate scandal in Vietnam in the last week have caused a rapid sell-off.

“The time to buy is when there is blood-in-the-streets,” is an investing expression that seems timely for the Vietnam market right now. Rapidly rising interest rates around the world however mean that things may yet need to get worse before they get better.

Should I invest now? "The trend is your friend", except when it's down.

Maybe not today, but perhaps soon. But it will take time.

Before you invest, you should remember that Vietnam is a volatile emerging market. That means the risk of loss. Not only that, but when monetary conditions are tightening like they are today, emerging markets tend to do badly. Brazil, Russia and many emerging markets had 60-80% declines from peak to trough during the financial crisis of 2008-09. That means the 45% year to date losses for VNM might just be the beginning.

Seriously, before you invest, talk to your advisor. Do proper financial planning. At the very least, stage your entry into VNM so you are prepared to buy as the price falls. It might take several months or even quarters before the market finds a bottom. If China makes a play for Taiwan, then all bets are off.

Our post is not financial advice, it doesn't take into consideration your situation and you should talk to your advisor before you do any investing in VNM, or anything else for that matter. Best of luck out there.