Investment Director Ng Xin Yao and Investment Manager Joe Lum of abrdn’s Asian Equities team share their key takeaways from a recent trip to Vietnam, which featured a mix of meetings with the Company’s holdings, prospects as well as discussions with analysts and journalists.

Economy: On the recovery track

The domestic economy has shown signs of recovery since the second quarter and strengthened further to grow 7.4% in the third quarter. Inflation is under control, easing sharply to 2.6% in September from 4.4% in July. There are mixed views on whether the central bank will cut interest rates following the US Federal Reserve’s easing move in September. Some believe that the central bank had cut rates a year ahead of the Fed and with the economy already improving, further rate cuts might risk the danger of economic overheating. Vietnam remains on the FTSE Russell watchlist for upgrade to emerging market, although an MSCI upgrade would be more key for capital inflows.

Figure 1: Exports have remained the main driver of economic growth

Source: Vietnam Strategy, On Point, 7 Oct 2024, Maybank

Politics: Past the worst and stabilising

The country is perceived to be past the worst of its political uncertainties, with the new general secretary, To Lam, seen as more economically pragmatic than the previous one. The prime minister and National Assembly chief are aligned with To Lam, which should allow for faster policy implementation. A new president will be elected, but the position is more ceremonial. The next significant event to watch is the 2026 party congress, which will decide the new politburo. We would view the likelihood of major policy shifts as low given the alignment of the top leadership.

Property: Close to a bottom on the back of new land law

We believe that the property sector is close to bottoming. This has been helped by a new land law, clarifying regulations on land use and land valuation among others, that came into effect in August. This new law has enabled some semblance of a return to normalcy in the sector and enhanced transparency around land transactions. That said, it may take six to 12 months for its actual implementation. The new law also changes the benchmark for land prices, essentially raising land cost. Meanwhile, demand for property, especially in the mass market, far exceeds the constrained supply. Developers, though, would still need to endure weak sales and cash flow for a while longer.

Through this cycle, real estate companies of higher quality such as Nam Long Group are consolidating the market and are well placed to profit when the recovery takes off.

Banking: Encouraging signs of a recovery

Vietnam's banking sector saw a challenging year in 2023 on the back of inflationary pressures, concerns over the property sector and a broader uncertain global backdrop. We saw slowing credit growth, net interest margin compression and higher non-performing loans (NPLs). Through our discussions with a few banks during our trip, we believe that the sector is showing positive signs of a recovery. We would see net interest margins stabilising and NPLs trending downwards. Meanwhile, we also noted nuances that elevate the sector’s return on equity but there was an apparent lack of systemic issues. Capital ratios are generally low. The regulator assesses the loan deposit ratio differently; if we apply the regular approach, the ratio would exceed 100% for Vietnamese banks. Also, system loan growth has outpaced deposit growth over the past few years. 

Figure 2: Vietnam's credit growth to GDP ratio averaged at 2.7x between 2010 and 2023

Source: Initiating on Vietnam Banks — Compelling Growth Story, 18 September 2024, Jefferies

Conclusion

We are positive about the prospects of Vietnam. The country is benefiting from global supply chain diversification and will continue to enjoy strong foreign investment as long as policies remain consistent. It has the third largest population in Southeast Asia (behind Indonesia and the Philippines) with over 100 million people. Education is improving, especially in areas like engineering, and thus companies like FPT Corp, a tech, telecom and education group, have been able to leverage on the relatively cheap but skilled workforce to provide IT services to companies in Asia. We see income and thus wealth growth as a key structural tailwind, driving consumption which we believe will be a core theme and thus benefitting several companies such as Mobile World, a retailer of electronics, home appliances and grocery.

Note: Nam Long, FTP Corp and Mobile World are held in the Asia Focus Trust.

Hustle and bustle: The traffic in Hanoi reflecting a bustling city in motion, as the domestic economy continues to power on, growing 7.4% in the third quarter.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

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