Vietnam is currently the best investment case, says Markus Winkler in an essay for finews.first. The trade war between the U.S. and China actually has had a positive effect on the country’s economy.

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For some years, there has been a trend to shift production capacity from China to Vietnam, because many of its workers are better trained and, what’s more, much cheaper. The escalating trade war between China and the U.S. has now prompted even more international firms – among them even some Chinese corporations – to move part of their production to Vietnam.

Vietnam has positioned itself very smartly with the help of numerous free trade agreements and thus has become a highly attractive manufacturing base. The result are record high foreign direct investments (FDI). Since January, FDI worth some $19.67 billion were agreed and $13.25 billion executed. The investment pipeline has already reached $160 billion and is growing rapidly. It acts as a guarantee for new jobs and rising incomes for a decade to come and thus for a higher purchasing power of the population.

«We can expect sustained, far-above-the-average economic growth for years to come»

The recently released figures for economic growth in the third quarter and first nine months of 2018 show that the positive conclusions for the country’s outlook are fully justified: Vietnam’s gross domestic product in the twelve months through September expanded by 7 percent, one of the highest rates in the world. With the two main growth drivers – demographics and foreign direct investment – still positive, we can expect sustained, far-above-the-average economic growth for years to come.

The other macro-economic key indicators also remain benign. Exports grew 15.4 percent in the first nine months and imports 11.8 percent, thus widening the trade surplus to 5.4 billion Swiss francs ($5.4 billion). With a traditionally strong balance of capital movements, currency reserves have risen further. Inflation remains under control: with higher energy prices and an increase in school fees in September, the annual inflation rate accelerated to 4 percent. Core inflation however, stripped of the volatile energy and food prices, was still at 1.6 percent. Hence there is no need for the Vietnamese central bank to change its monetary, credit and interest rate policies.

«Vietnam will definitely not be able to duck a global bear market»

Since 2016, Vietnam has one of the world’s most attractive stock exchanges. Speculation about an upcoming inclusion of Vietnam into the MSCI Emerging Market Index in October 2017 prompted it to break out of its trend channel and started a veritable boom. In April 2018 came the overdue correction, which moved the index back to the long-term trend channel – a very healthy development. As the public corporations had an average profit growth of 29 percent in the first half of 2018, a continuation of the upward trend is to be expected, following a six-month correction and consolidation.

The high valuations and increasing jumpiness on the major markets may however put a spanner in the works for the country. The Vietnamese exchange will not be able to duck a global bear market, even if the situation in many emerging markets – and particularly so in Vietnam – is much different. As the economic outlook remains excellent and the stock valuations remain less than half those of similar tiger economies, this would only correspond to a shift along the time axis.

«This will rekindle the government’s and parliament’s work to make further privatizations»

Unfortunately, the MSCI missed the opportunity in June to put Vietnam on a list of candidates to be included in the MSCI Emerging Markets Index and thereby to give an additional incentive to the Vietnamese government to implement several reforms and liberalization measures. Meanwhile, FTSE Russel added the country to the candidate list for the introduction into the FTSE Russell Emerging Markets Index. This will rekindle the government’s and parliament’s work to make further privatizations and to make the necessary amendments to the securities law.

At the same time, it will put index provider MSCI under pressure to follow suit, if it doesn’t want to weaken its leading position for the launch of exchange traded funds. Parliament will discuss the securities law later this month and the law is due to be adopted by May 2019. The securities should in other words be adopted just in time before the next decisions are made by the MSCI (June 2019) and FTSE Russell (September 2019).

«The biggest risk comes from the ultra-expansive monetary policies of the major central banks»

In my view, Vietnam will remain the best macro story and the most interesting investment case from a worldwide perspective. The biggest risk comes from the high valuations of major markets, after the ten years of ultra-expansive monetary policies of the major central banks. If they were to release some pressure, even the cheaper markets such as Vietnam would suffer. But the valuations will recover more quickly because they already are comparatively cheap.

Markus Winkler graduated from University of St. Gallen (HSG) and later received training at two big Swiss banks. He went on to found VGZ Vermögensverwaltungs-Gesellschaft Zürich, of which he remains the chairman. Over the years, Winkler became one of the best informed experts of Vietnam. He visited the country for the first time in 1994, made his first investments in Vietnam in 2001 and has since brought more than one billion Swiss francs to the country. He regularly visits for months at a time and has earned himself the nickname of Mr. Vietnam.

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