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“Vietnam – the main beneficiary of U.S. and China trade war”

Salt production in Vietnam

With no end in sight to the U.S.-China trade war, more and more companies are looking for alternatives to their production and supply chains. Southeast Asian countries are an attractive possibility, with Vietnam being one of the main contenders, says Thomas Hugger, CEO and founder of Asia Frontier Capital Ltd.

AsiaFundManagers.com: How does the U.S.-China trade war impact Vietnam?

Thomas Hugger: The U.S.- China trade war has so far had a positive economic impact on Vietnam. Before the start of the conflict, there was already a trend of moving manufacturing jobs from higher cost locations, like China, to Vietnam, due to lower wages. South Korean companies like Samsung and LG were some of the earliest ones to make the move. Now, Samsung manufactures most of their mobile phones in Vietnam. Over the past year, as the trade war between the U.S. and China has accelerated, there has been even more impetus for companies to relocate to Vietnam. In 2018, overall foreign direct investment (FDI) in Vietnam grew by 9% to $19 billion. So far this year, in 2019, FDI has grown by 7.5% to $7.3 billion. China itself has made more FDI commitments for new projects this year than any country, with its commitments totalling $1.56 billion.

“Textile companies shifting manufacturing capacity from China to Vietnam”

Thomas Hugger: This growth of FDI mainly in the manufacturing sector points to companies looking to increase capacity primarily for exports. Vietnam is one of the few countries whose exports have grown so far in 2019. Its exports have increased 6.7% year-over-year, whereas most other Asian countries are struggling to grow exports. Furthermore, exports to the U.S. this year have grown by 28%, which is also a reflection of customers sourcing more from Vietnam. Both increased FDI and higher exports to the U.S. are a reflection of Vietnam benefitting from the trade war. In addition, we know that most Hong Kong-based textile companies have shifted a large part of their manufacturing capacity from China into lower cost locations like Vietnam over the past five years. The industrial park companies that we meet in Vietnam inform us that they are seeing increasing inquiries from China-based companies looking to shift their production to Vietnam.

AsiaFundManagers.com: How is the Vietnamese stock market reacting to the conflict?

Thomas Hugger: The Ho Chi Minh VN Index has so far shown a positive performance of +5.2% this year and shares of industrial parks have also performed well recently.

AsiaFundManagers.com: Which sectors benefit most?

Thomas Hugger: With Vietnam continuing to transform into a manufacturing hub, and trade playing an important role, we believe companies linked to trade and industrial development will do well. We believe that industrial park developers and logistics companies can see increased growth over the next few years as Vietnam sees higher FDI and trade. In addition to this, as more manufacturing jobs are created and therefore disposable incomes rise, we are very positive on consumer discretionary companies like automobile and modern retail.

“Vietnam to be one of the fastest growing economies over the next five years”

AsiaFundManagers.com: What are the reasons for investing in Vietnam?

Thomas Hugger: Vietnam is transforming into a manufacturing hub, not just because of lower wages or due to the trade war, but also because of political stability and a large, young workforce. From a geographical perspective, it fits nicely into the manufacturing supply chains of northern and southeast Asia. This will further benefit its manufacturing sector. A combination of these factors should lead Vietnam to be one of the fastest growing economies globally over the next five years, with an average GDP growth rate of 6.5%. This sustained growth along with rising income levels will lead to investment opportunities across sectors mentioned earlier, such as logistics, industrial parks, and consumer goods.

In addition, Vietnam is transforming into an attractive tourist destination. The country has seen international arrivals double over the past five years, to reach 15.5 million arrivals. With the growth of low-cost carriers in the region, we believe Vietnam will continue to attract an increasing number of tourists. One of the best ways to get exposure to this trend is by owning airport operators, as we do. Besides the growth story of Vietnam, valuations for the market are also attractive relative to peers. The trailing 12-month P/E ratio is at 16.3x, which is at a discount to regional markets like Thailand, the Philippines, Indonesia and India. And earnings are expected to grow at 11-12% over the next three to five years.

AsiaFundManagers.com: There are signs that the pressures of rapid growth in Vietnam are taking their toll, e.g. rising labour costs. How can Vietnam deal with these challenges?

Thomas Hugger: Labour costs in Vietnam are rising in line with inflation. Although there is concern that labour costs could rise further, wages in Vietnam are still significantly lower than in China. For example, the minimum wage of $171 in larger cities such as Hanoi and Ho Chi Minh City, is almost half that of the manufacturing hub of southern China. Vietnamese wages are also lower than other southeast Asian countries like Indonesia and the Philippines. Also, as mentioned earlier, Vietnam’s geography fits very well into manufacturer supply chains in north and east Asia, while also offering good infrastructure and logistics. So wage levels are not prospective investors’ only consideration when looking at Vietnam.

Vietnam needs to produce more value-added goods

Thomas Hugger: Vietnam has a labour force of 70 million, which is still large and young as the median age of the population is 30. Currently, the country is focusing on manufacturing lower-end goods like clothing and footwear, and assembling electronic items like mobile phones, laptops, and consumer appliances. But this is also how the manufacturing value chain originated in China, Hong Kong, Japan and South Korea, before these countries moved up the value chain to produce less labour-intensive and more value-added goods. Similarly, we expect Vietnam will need to move up the value chain to produce more value-added goods to overcome some of the challenges it could face with labour supply. However, this shift to value-added goods would be a long-term trend. Since Samsung already manufactures most of its mobile phones in Vietnam and LG also has a strong presence, Vietnam can benefit from these companies’ expertise in evolving into value-added manufacturing and ensuring that its economic growth over the next five years is sustainable.

AsiaFundManagers.com: Thank you very much for the interview.

Thomas Hugger, AFC, on the trade war impact on Vietnam
Thomas Hugger, CEO and Founder of Asia Frontier Capital Ltd.

Thomas Hugger
CEO and Founder
Asia Frontier Capital Ltd.

Asia Frontier Capital Ltd. manages the AFC Asia Frontier Fund, AFC Iraq Fund, AFC Uzbekistan Fund and AFC Vietnam Fund. Thomas Hugger has spent 27 years in private banking where he specialized in managing portfolios of listed and unlisted equities. He has been investing in Asian and African Frontier Markets since 1993. He is the former Managing Partner, CFO & COO of Leopard Capital, Cambodia, and was previously a Managing Director and Head of Portfolio Management at LGT Bank in Hong Kong. He also held senior investment positions at Bank Julius Baer in Zurich and Hong Kong. Thomas was the founding shareholder of one of the largest brokerage companies in Bangladesh. He is also a Certified Financial Investment Analyst (CFIA) and Investment Adviser (Switzerland) and a Certified European Federation of Financial Analysts Societies (EFFAS) Financial Analyst.