- Although it was once as poor as Ethiopia, Vietnam has seen astounding economic growth since 1990 and only stands to gain from the ongoing U.S.-China trade war.
- Today, Nicholas Vardy explains why Vietnam is an exciting emerging market and could be an important addition to your ETF portfolio.
For Americans of a certain generation, the word Vietnam still evokes one of the most shameful chapters in American history.
The Vietnam War also profoundly touched my family.
My uncle was killed in Vietnam in 1970 at the age of 22. He had just been deployed as a member of the 101st Airborne Division.
Here’s what’s so ironic and surprising about Vietnam almost 50 years later: In a world awash in anti-American sentiment, today there is very little trace of Vietnamese hostility toward the United States.
The fall of Saigon in 1975 signaled the end of the Vietnam War. The U.S. and Vietnam restored diplomatic ties 20 years later in 1995. And today, the U.S. has become Vietnam’s largest export market.
The U.S. and Vietnam no longer argue about war crimes or missing soldiers. Instead, they debate tariffs and access to each other’s markets.
A Primer on Vietnam’s Economic Reforms
Until the 1980s, Vietnam was as poor as Ethiopia.
Inspired by China, Vietnam’s Communist leaders launched the doi moi (translated as renovation) in 1986.
The results may be the most underappreciated economic success story on the planet.
Since 1990, Vietnam has notched up the world’s second-fastest growth rate per capita after China. But unlike China, Vietnam has not slowed down.
Vietnamese GDP rose by 7.1% in 2018, its best performance since 2007. GDP growth is likely to hit 7% in 2019 as well.
Here’s why I believe Vietnam’s economic boom is set to continue…
First, Vietnam has a young and educated population.
Two-thirds of Vietnam’s population of 95 million are under the age of 35. (That makes Vietnam much bigger than the United Kingdom, France or even Germany.)
The government spends almost 6% of its GDP on education. Vietnam’s 15-year-olds now perform as well in mathematics and science as their German counterparts.
Second, Vietnam has attracted massive foreign direct investment (FDI). FDI climbed by 9.1% in 2018 to $19.1 billion. That marked a sixth straight annual record.
What’s the attraction for foreign investors?
Labor costs in Vietnam are still low compared with China. Doing business in Vietnam is far easier than it is in India. And the Vietnamese government recently cut the corporate tax rate to 20%.
Third, the Vietnamese have a reputation for being hardworking and entrepreneurial. It’s hard to bet against a country whose population is young, educated and ambitious.
The Winner of the U.S.-China Trade War
If there has been any winner of the U.S.-China trade war, it is Vietnam.
Of course, Vietnam attracted manufacturers even before the trade war, but there is little doubt the conflict accelerated this process.
Multinational firms are rejigging supply chains to avoid U.S. tariffs on Chinese goods. And Vietnam is turning into the No. 1 alternative.
Apple supplier Foxconn has already started to shift production out of China to India and Vietnam. Shoe manufacturer Brooks Running is shutting down its operations in China to move to Vietnam. Samsung is also closing its last Chinese factory. It already makes most of its smartphones in Vietnam.
No wonder Vietnam’s exports to the U.S. are soaring. Its trade surplus with the U.S. is on track to reach $50 billion this year. That’s a big number for a $240 billion economy.
Vietnam also just signed a trade deal with the European Union to eliminate 99% of tariffs on goods and services.
That means Vietnam’s exporters now have opportunities in both the world’s largest economy (the U.S.) and the world’s largest single market (the EU).
Investing in Vietnam
Vietnam is firing on all cylinders. But does that make it a good investment?
Vietnam has made remarkable progress. But it still isn’t on the radar of most investors. That’s precisely where the opportunity is.
Today, Vietnam’s per capita GDP stands at around $2,500. That compares with more than $9,750 in China. By that measure, Vietnam is where China was in about 2007.
Vietnam is still classified as a frontier market. But it is scheduled to be promoted to the MSCI Emerging Markets Index. Once that happens next year or in 2021, I expect Vietnamese stocks to soar.
The best way for a U.S. investor to get ahead of the curve is by buying the VanEck Vectors Vietnam ETF (NYSE: VNM).
Good investing,
Nicholas