Covid-19: short-term blow, long-term opportunity for Vietnam

Vietnam has been comparatively successful in containing the coronavirus’s spread thus far. Though a reliance on the globalised tourism and manufacturing sectors means it will take a sizeable economic hit regardless, its economy looks poised to benefit longer term, in a continuation of trends sparked by neighbour China’s trade war with the US.

According to John Hopkins University on 10 April, Vietnam had just 255 confirmed cases, and no deaths, compared to more than 2,000 cases in nearby Thailand, as containment measures taken by the one-party state have been draconian but effective.

Related: Vietnam has NO new cases of coronavirus to report on Friday morning

The response has focused on tracking down infected individuals and tracing their second and third-hand contacts, and mass quarantining. Official figures showed nearly 45,000 people were quarantined as of 26 March, according to Reuters, while more than 30,000 had been tested for the virus.

However, Michael Kokalari, chief economist at the investment manager of VinaCapital Vietnam Opportunity (VOF), still expects serious damage to the country’s economy.

VOF, a £483m Guernsey investment company, is one of the two main Vietnam-focused funds listed in London, the other being the £805m Vietnam Enterprise Investments (VEIL) managed by Dragon Capital.

‘There are a few reasons to believe that the impact of Covid-19 on Vietnam’s economic growth in 2020 will be worse than most expect, due to its impact on the country’s tourism sector, and on its manufacturing sector,’ Kokalari said. He pointed out the sectors accounted for roughly 12% and 20% of Vietnam’s GDP respectively and around two fifths of Vietnam’s manufacturing inputs come from China, resulting in heavy disruption.

‘That said, Covid-19 (like the trade war) will ultimately be a powerful catalyst to prompt the movement of factories from China to Vietnam,’ Kokalari added, referencing the ‘stronger psychological impact that supply chain will have on corporate executives’.

He cited a February report from credit rating agency Moody’s, which predicted Vietnam’s GDP growth will ultimately increase by 2% due to the combination of the virus and trade tensions.

However, the report also mentioned the timescale of this shift was unclear and ignored any threat of the US imposing tariffs on the country. US president Donald Trump last year called Vietnam ‘the single worst abuser of everybody’, in terms of trade surpluses.

The south-east Asian nation’s economy grew by an estimated 7% in 2019, beaten only by Cambodia in the region.

A recent World Bank report forecasts Vietnam’s GDP will now grow 4.9% this year, shaving 1.6% off the previous prediction but noting the so far successful containment of Covid-19 meant the worst effects had been limited. That is much more resilient than Cambodia, expected to see growth drop from 7.1% last year to 2.5%.

Vietnam’s growth is then predicted to rebound to 7.5% in 2021, with the report also highlighting the benefits of a recent trade agreement with the EU.

For VOF, Vietnam’s growing domestic consumption is the real driver for investing in the country. In its recent annual report, investment manager Andy Ho said it was ‘especially noteworthy’ that consumer spending growth had accelerated from about 8% growth year-on-year to over 9% in 2019.

Petrolimex Aviation, a fuel services company, is a recent private equity investment playing into this trend and Vietnam’s strength in tourism.

‘The travel industry in Vietnam will continue to grow as domestic travellers have fully embraced the convenient and inexpensive options to fly, while international visitors will eventually return, resulting in both surging tourism and direct investments,’ said Ho.

VOF, a winner of Citywire’s best investment trust best board award two years ago, has seen its shares fall 17% in the past three months, according to Morningstar data, while VEIL, a London-listed Cayman Islands-based fund, is down nearly 20% and the wider Vietnamese market 15%.

Both have good shareholder returns over 10 years, around double the country’s immature stock market, with VOF delivering a 159% gain and VEIL 174%. However, both have seen their shares fall further behind their net asset values in the latest downturn, to leave VOF on a discount of 20% and VEIL 10% below NAV,

Reporting by Jeremy Gordon. This article originally posted on citywire