During their visit, Investment Director Xin Yao Ng and Investment Manager Joe Lum met with local managers, discussed investment prospects, and participated in broader conversations with analysts and journalists in the area. They are now prepared to provide a comprehensive debrief on their insights and experiences.
On the recovery track
Vietnam’s economy has shown signs of recovery since the second quarter and strengthened further to grow by 7.4% year over year (y/y) in the third quarter. Inflation is under control, easing sharply to 2.6% y/y 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 (Fed) easing move in September. Some believe that with the Vietnam central bank already cutting rates a year ahead of the Fed and with the economy already improving, further rate cuts might increase the risk of economic overheating.
Vietnam remains on the FTSE Russell watchlist for a potential upgrade to emerging market status, although an MSCI upgrade would be more key for capital inflows.
Past the worst and stabilizing
Today, Vietnam is widely considered to have moved beyond its most significant political uncertainties. The recently confirmed President and new chief of the Communist Party, Tô Lâm, is believed to be more economically pragmatic than his predecessor, Nguyen Phu Trong. The Prime Minister and the National Assembly chief also seem aligned with Lâm, which should facilitate faster policy implementation.
The next significant political event to watch is the 2026 party congress, which will decide the new politburo. However, given the top leadership's current policy alignment, we think the likelihood of major policy shifts is low.
Close to a bottom on the back of a new land law
With a new land law coming into effect in August and, among other things, providing clarity on regulations, land use, and land valuation, we believe the property sector is close to bottoming.
A new law has improved the transparency of land transactions and enabled some semblance of return to normalcy in the sector. That said, full implementation may take six to 12 months. The new law also changes the benchmark for land prices, essentially raising land costs. Meanwhile, demand for property, especially in the mass market, far exceeds the constrained supply. Developers, though, will likely still need to endure weak sales and cash flow for a while longer.
Through this cycle, higher-quality real estate companies have been consolidating their market positions and appear well-placed to profit when the recovery takes hold.
Encouraging signs of a recovery
Vietnam's banking sector had a challenging year in 2023 on the back of inflationary pressures, concerns over the property sector and broader global uncertainties.
We now see slowing credit growth, net interest margin compression, and higher non-performing loans (NPLs). However, during our trip, the discussions we had with various bank representatives suggested that the sector is showing positive signs of a recovery. Accordingly, we anticipate seeing net interest margins stabilizing and NPLs trending downward.
We also observed some nuances that may help to elevate the sector’s return on equity. Although there appear to be few major systemic issues in the banking sector, capital ratios are generally low. The Vietnamese banking regulator also assesses the loan-deposit ratio differently from what would be considered normal; if we apply the more regular approach, the loan-deposit ratio would exceed 100% for Vietnamese banks. This is consistent with Vietnam loan growth outpacing deposit growth over the past few years. (Chart 1)
Chart 1. Vietnam's credit growth to GDP ratio averaged at 2.7x between 2010 and 2023
Final thoughts
We are positive about the economic prospects for Vietnam. The country is benefiting from global supply chain diversification and will continue to enjoy strong foreign investment as long as policies remain consistent. The country 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, technology, and telecommunications, and thus, have been able to leverage the relatively cheap but skilled workforce to provide IT services to companies in Asia. We see income growth as a key structural tailwind for consumption, which we believe will be a core investment theme beneficial to Vietnam’s economy.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
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