Vietnam’s Economic Journey Toward Prosperity

As Vietnam's economy rapidly expands, outpacing their ASEAN peers, it presents a unique opportunity for investors. This growth is underpinned by diverse sectors, from high-tech manufacturing to natural resources, and bolstered by significant trade relationships, especially with the United States and China. However, Vietnam's increasing importance in global trade obscures its robust domestic market, fueled by a growing middle class and favorable demographics. We will explore Vietnam's transition from a frontier to an emerging market, its resilient domestic economy, and how the country's reforms to liberalize its economy have led to remarkable growth, offering a compelling case for investors looking to diversify their emerging markets allocation.

From Poverty to Prosperity

In 2022, Vietnam exported roughly $371.4 billion in goods and services. This figure represents a striking turnaround for a country that experienced limited economic activity and a low standard of living just forty years ago.

Export and Import Growth Surged Since Economic Reforms

Source: Macrotrends.com as of 12/31/2021.

Vietnam's journey towards economic prosperity over the past few decades has been driven largely by sweeping economic reforms known as "Đổi Mới", initiated in 1986. These reforms marked a radical shift from a centrally planned economy to a market-oriented one, laying the groundwork for Vietnam's increased exports and deeper integration into the global economy.

Before Đổi Mới, Vietnam's economy was isolated and heavily reliant on Soviet support. The reforms ushered in policies that encouraged private enterprise, deregulated state-owned industries, and opened the country to foreign trade and investment. One of the most significant changes was the shift in agricultural policy, moving away from collectivization to allow private ownership of farms. This change boosted agricultural productivity and turned Vietnam into one of the world's leading exporters of rice.

The liberalization of trade policies under Đổi Mới was instrumental in attracting foreign direct investment (FDI). Major multinational corporations were enticed to set up manufacturing and export-oriented units in Vietnam, benefiting from its strategic location, competitive labor costs, and increasingly skilled workforce. This led to a surge in exports, particularly in textiles, footwear, and electronics, propelling Vietnam into a significant player in the global supply chain.

Vietnam's accession to the World Trade Organization (WTO) in 2007 marked another milestone, further integrating it into the global economy. The country has since been a part of numerous free trade agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement, enhancing its export potential.

This export-led growth, in turn, has fueled domestic demand. As exports grew, so did the economy, resulting in increased incomes and a burgeoning middle class. This new wealth has translated into higher consumer spending within Vietnam. The growth in domestic demand is evident in the rising consumption of goods and services, increased urbanization, and the expansion of the retail sector.

Vietnam's economic reforms have created a virtuous cycle: reforms spurred exports, which in turn drove economic growth, leading to increased domestic demand. This trajectory has positioned Vietnam as a dynamic and integral part of the global economy, with a domestic market that continues to show robust growth potential.

Demographics and Domestic Demand

Vietnam's demographic profile is also helping to drive strong domestic demand. Vietnam's population has grown nearly 200% in the last sixty years and boasts one of the youngest populations in the world. Over 60% of its population is under the age of 30, meaning there is a long runway for these young citizens to grow and help to contribute to Vietnam's economy. Additionally, the population is relatively well-educated, with a literacy rate of over 90%. Vietnam's growing middle class is expected to enjoy high disposable income, which will in turn fuel domestic demand and growth.

When compared with other emerging markets countries, Vietnam sits in the middle of the pack, with a higher private consumption ratio to GDP than Saudi Arabia and China, but lower than Brazil and the Philippines. This strong domestic demand component provides a buffer to external forces such as an increasingly protectionist trade partner (U.S.) and a slow-growing one (China).

Vietnam’s Growing Middle Class is Fueling Consumption

Private Consumption as a % of GDP

Source: CEIC as of June 2023.^*China data is as of December 2021.

Benefits of a Domestically Driven Economy

The benefits of a domestically focused economy cannot be ignored. Instead of relying on external forces like global market conditions, foreign demand and trade policy, domestically driven economies bring a slew of benefits for those countries which can transition away from primarily relying on exports. These include:

• Stability and resilience: Economies driven by domestic demand are typically more stable because they are less affected by international market conditions and political tensions.
• Diverse economic structure: Domestically driven economies are typically more diversified than their exporter counterparts, who often rely on cyclical exports such as commodities.
• Independence from external factors: These economies are less reliant on external factors like foreign demand, currency fluctuations, trade policies and commodity prices.
• Strengthening of local industries: When domestic demand is strong, local companies provide more and more services, which leads to a positive feedback loop of increased innovation and competitiveness.

Domestically focused economies do have some drawbacks, including vulnerability to economic cycles, limited diversification and susceptibility to inflationary pressures. However, the argument stands that Vietnam has grown into a well-diversified economy that strikes an attractive balance between export-led growth and growing domestic demand that enjoys robust exports in addition to a growing domestic consumer base.

Local Vietnamese Equity Exposure and Performance

Vietnam's public equity opportunity set is heavily weighted towards Financials, Real Estate and Consumer Staples. In the MarketVector Vietnam Local Index, the top ten holdings are skewed towards these sectors, and are also heavily dependent on domestic revenues. This also lends credence to the argument that the Vietnamese economy enjoys robust domestic demand.

Source: Factset as of 10/31/23. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index.

Despite macro shocks including the Covid pandemic and economic problems in China, local Vietnamese stocks have outperformed broad emerging markets benchmarks since 2018. We believe that given Vietnam's economic and market-structure progress over the past decade, investors should look closely at this emerging opportunity.

Outperforming Emerging Markets Since 2018

Source: Morningstar as of 11/29/23. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index.