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Trade War Shifts the View to Vietnam
06/06/2019 5:00 am EST
By now you will be aware that the U.S. has a serious trade war going on with China and it may continue for some time, with major implications for the economies of both countries and for world trade, observes Glenn Rogers, contributing editor to Internet Wealth Builder.
It appears increasingly likely that the stalemate may go on for quite some time, perhaps even years. Both counties will take a hit to their GDPs according to economists.
Will anyone benefit? Yes. As we consider the global supply chain, it is likely that, over time, U.S. companies will hedge their bets and move production to countries that are less likely to face the Trump administration's ire.
There are a number of these jurisdictions that stand to benefit, including Malaysia and India. But one of the main potential winners is Vietnam.
It may be that Vietnam has the most to gain of any nation from this trade war due to its low labor costs and lax regulations. Multinational companies have already begun moving production to Vietnam over the last few years, including Nike and Samsung.
Vietnam shares a border with China, so supply lines are relatively short and easily managed. As a result, many of the companies moving to Vietnam are actually Chinese.
The first quarter of 2019 saw foreign investment in Vietnam rise by 86.2%, to US$10.8 billion. Chinese investment accounted for almost half of that according to the Chinese state-run Securities Times newspaper.
Vietnam has grown faster than almost any other country in the past decade, with an annual compounded growth rate of 14%. This ranks Vietnam as Asia's second fastest growing economy, second only to China. The currency is stable, labour is cost competitive, and the country offers a favorable business climate supported by the government.
Americans still remember the Vietnam war, and some view the country with suspicion. But that's all behind us. The government is open to foreign ownership of companies in Vietnam and has been privatizing state-owned businesses. This means investors can own a larger share in local banks, which will provide more liquidity for the banking system overall.
So how can investors take advantage of this growth? The complicated way is to open a brokerage account in Vietnam and trade on one of their two stock exchanges. Clearly, this is unlikely to be very appealing for most of our readers so let's look at some other options.
If you want a fund that totally focuses on Vietnam, consider Van Eck Vectors Vietnam ETF (VNM). The fund holds a market cap-weighted portfolio of Vietnamese stocks. This fund covers approximately 70% of the companies listed in Vietnam. The rest are international firms that generate a majority of the revenues in Vietnam.
The fund is down from its 52-week high of $17.79, reached about a year ago at this time. The five-year average annual compound rate of return to April 30 was -1.6%. However, the fund is up about 10% so far this year.
This is as close to a pure play on Vietnam as you'll get. It offers exposure to a range of sectors like local cyclicals and industrials plus a sprinkling of companies from Japan, the U.K. and South Korea that get a significant amount of the revenue from Vietnam.
There are 26 stocks in the portfolio. Unless you're already invested in Vietnam, you're probably never heard of the top companies in this ETF. But, for the record, they include Vingroup, Vietnam Dairy Products, Vinhomes, No Va Land Investment Group, and Bank for Foreign Trade of Vietnam.
About 70% of the portfolio is in Vietnamese companies with 14% in South Korea, and about 5.5% each in Japan and Taiwan. In terms of sectors, real estate dominates with 27% followed by financials at 15.5% and consumer staples at 14.1%.
The fund was launched in August 2009, so we have a record of almost 10 years to work with. That said, the investment dynamic in Asia has changed dramatically over that time so past history may not be as relevant as, say, with a European fund.
The fund has $421 million in assets under management and has an expense ratio of 0.68%. Distributions are made annually, in December. The latest was $0.122 per unit.
There are risks. Vietnam is considered a frontier economy, which means it carries above-average risk. Political risk is also a major consideration — for example if the U.S. and China reach a deal the flow of new capital into Vietnam could drop dramatically.
There is also economic risk and currency risk to consider. In short, this should be considered a high-risk position and should only comprise a small amount of your portfolio.
Buy for capital gains potential but keep a close eye on political developments in Asia and be prepared to sell if the conditions that currently favor Vietnam should change.
Trying to trade around Mr. Trump's tweets and the up-and-down trade story is tough, but the growth that Vietnam is experiencing should be a long-term play that deserves a small place in your portfolio.
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