Don’t put all your eggs in Vietnam’s basket

Although I’ve written a fair amount about my dislike for Vietnam’s strictly business attitude devoid of any friendliness, and its growing consumerism and obsession with money, the flip-side is that Vietnam has a rapidly growing economy. Perhaps the focus on making money and buying “stuff” is a reaction to decades of economic imprisonment. Whatever the reason, the growth was evident from the moment we stepped into Saigon. The building everywhere, the new ATMs, the preponderance of motorbikes. While this could describe many Asian locales, it’s the type of buildings going up, the fact that nearly all of the ATMs and motorbikes are new, and the absence of cars (the next step up from motorbike) that indicate Vietnam’s growth is rapid and new. In Indonesia, I picked up a copy of The Economist whose cover-story was a special report on “Vietnam: Asia’s Other Miracle. Indeed, it was just over twenty years ago that Vietnam was on the brink of economic collapse and famine. Vietnamese were synonymous with “boat people” for the whole the 1980s. It had only taken a decade for the Communist party to totally destroy the country with its policies. By the mid-80s, they saw the writing on the wall and began to liberalize. Since then, its been a slow, but gradual process, with private property becoming legal in 2000.

The abandonment of Communist economic policies for capitalist ones is the reason that today (scales aside) Vietnam looks more like China than Lao. In the past five years, two stock markets have been formed, in Saigon and Hanoi, repectively. Between the encouragement of somewhat free markets and the government’s concerted effort to help the poorest segments of the population (something other Asian nations should at least attempt), the middle class is growing rapidly and driving domestic consumption. Not only is foreign direct investment (FDI) flowing into the country at an accelerated pace, but Vietnam is also investing heavily in neighboring countries to meet the demand its creating. Writing about specific market opportunities in Vietnam is futile for several reasons. One, unless you’re part Vietnamese, foreigners cannot open investment accounts. Two, the only fund (besides hedge funds, PE, and institutions) that offers a Vietnam-focused fund is small UK-listed one (Americans can buy it OTC, using symbol VTOPF). Three, with so few offerings, it makes more sense to write about individual stocks, rather than sectors, something beyond the scope of this post (not to mention my expertise). All that being said, many analysts and market observers say that Vietnam is a ten-year buy. Its 8-9% GDP growth is projected to sustain itself at least another decade. Looking at Vietnams two largest and fastest growing firms (Vinamilk and Vinpearl, foodstuffs and tourism respectively), it is clear that this is not going to be a purely export-driven boom. Even more exciting is that Vietnam is in the very early growth stages. Very early. Imagine investing in China or India ten years ago. Imagine investing in any OECD country in the 50s. Vietnam is at the bottom of what many expect to a huge parabolic spike in economic growth.

But before you throw all your money in that UK-based Vietnam Fund or any of the other funds that are bound to open in the near future, you better know the risks of investing in Vietnam. Yes, Vietnam is growing extremely rapidly, but so is inflation. GDP growth is hovering around 8%, but the April inflation reading indicated 21% inflation (year over year). To give you a frame of reference, China’s GDP is growing at about 9% with a high 9% inflation, while India’s GDP is just below 9% with 7-8% inflation. Vietnam’s economy could very well overheat and derail, with inflation dually destroying Vietnamese wealth/savings/earnings and increasing businesses’ input costs to fatal levels. We just came from Indonesia, which was more developed in 1997 than Vietnam is today, but was stopped dead in its tracks and remains the same today. The Asian Financial Crisis wreaked havoc on Indonesia and Indonesians, who watch their rupiah go from 3,000 to the dollar to 10,000 to the dollar within a weeks span. Inflation or a similar financial crisis could do the same to Vietnam, especially since Vietnam’s government is inexperienced and ill-equipped to deal with the growing free market economy. Even if the government can bring inflation down without seriously hurting growth, there’s still the danger of market volatility. Market caps are small and trading thin, plus 25% of Viet securities are owned by foreigners. To witness the effects of foreign outflows, look at a 2008 YTD chart of Vietnam’s index. Down 50% ytd, making it the worst performing market in the world this year. I’ve outline a lot of big risks, so if you’re still interested, perhaps this correction provides a good buying opportunity. Even if you’re not interested, you may consider allocating a very small portion of your portfolio to Vietnam (which can be done via a plethora of Asian-focused funds out there), as even just a few dollars can grow to a sizable sum with good returns. At this moment in time, I feel that Vietnam offers both the biggest risks and returns in Asia.