The Next Asian Tiger: How you can profit from Vietnam’s economic miracle
Today's Financial News - Posted January 11, 2008
| A Today’s Financial News Research Report: ‘In the global economy, cheap labor is your most valuable asset. With wages a third lower and industrial land cheaper than in China; Vietnam is more open to foreign companies who want to lease land and build their own factories; and the median age of country’s 90 million citizens is 26 years old.’ — J. Christoph Amberger |
by J. Christoph Amberger, TodaysFinancialNews.com
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Baltimore (TFN): In 1986, after 40 years of war with France, America, Cambodia and China and a decades-long struggle among factions of its own people, Vietnam’s ruling party turned around and discovered that war and communism had made starvation a reality in one of the most fertile countries in the world.
A new generation of political leaders in Vietnam’s ruling party gave confiscated farmlands back to their original owners and opened the economy to private businesses and entrepreneurialism.
Since then, the Vietnamese haven’t looked back. In the last 20 years, Vietnam has turned from an impoverished third-world nation into a thriving country full of industry growth and profit opportunities for investors.
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Now don’t get me wrong here. The new government still has a healthy dose of repression in it. The right to vote still means you can just pick one of two candidates pre-approved by the communist party to maintain the status quo in the national government.
But the Vietnamese economy and markets are more open to foreign capital and investors than China is.
Vietnam realized early in its capitalist development that it wouldn’t get too far without foreign help. And unlike China, which still limits access to mainland stock markets to Chinese citizens, non-resident investors can open accounts with local brokerage houses and invest their money directly in the Vietnamese market.
As a result, Vietnam is drawing Western manufacturing contracts away from Asia’s other big three: China, India and South Korea. And like them, it has a favorable exchange rate to the U.S. dollar, with one dollar converting to 16,115 Vietnamese dong. For perspective: 3,000 dong in Vietnam has the equivalent buying power of $1 in the States.
Pegged rate
In the 1990s, a now-forgotten Vietnamese politician coined the immortal phrase “Our dong is firm.” Indeed, by 1999 Vietnam had adopted a crawling peg against the dollar.
This will continue to drive down the value of the dong against the dollar considerably over the next few years. Like China’s low-balling peg of the dollar against the yuan, this will not just guarantee that Vietnamese exports stay competitive on the global market.
It will continue to attract Western manufacturers like Intel, which plans to open a $605 million semiconductor assembly and testing plant in Ho Chi Min City (formerly Saigon) later this year.
In the global economy, cheap labor is your most valuable asset. Vietnam already has wages a third lower than China’s. Industrial land is cheaper than it is in China; the country is more open to foreign companies who want to lease land and build their own factories; and the median age of Vietnam’s 90 million citizens is 26 years old.
Brass tax
In the last decade, Vietnam has tripled its per capita gross domestic product, and the country’s per capita income more than doubled. Economic growth in Vietnam has been 7% or higher every year since 2002. In 2006, growth reached 8.2%. And the country recently released figures for the first five months of 2007.
From January through May, Vietnam’s economy grew 7.9%. In the same period, the country’s industrial output increased by 16.8% and export s rose 18.4%. The government is predicting 9% growth in the second half of 2007 and at least 8% annual growth through 2010.
Seven years ago, Vietnam opened its first stock market, the Ho Chi Min City Securities Exchange. Today, the country has two exchanges, one in Ho Chi Min City and the other in Hanoi. Together, they have about 200 listed companies and a market cap of $20.5 billion. And about a quarter of that money is from foreign investors, according to estimates.
In December of 2006, congress granted Vietnam “permanent normal trade relations” with the United States, a decade after the two countries reopened diplomatic negotiations in 1995. Before the new trade status, Vietnam-U.S. trading was functioning under an act that discriminated against a list of “nonmarket” economies.
Vietnam became the 150th member of the World Trade Organization (WTO) in January, legitimizing it as a viable investment option for many international businesses and initiating a flood of foreign money into the country.
But this crisis of confidence spells a contrarian opportunity…
Building bridges
Just like other emerging markets in Southeast Asia, Vietnam is still an agrarian society outside of the country’s two main cities of Hanoi and Ho Chi Min City.
Western companies are moving into the established industrial areas and building brand-new industrial areas in those two cities to capitalize on Vietnam’s many outsourcing and manufacturing benefits. And the influx of foreign money is pushing into the Vietnamese countryside and bringing the entire country into the 21st century.
Clothing and fabric are Vietnam’s largest exports. Nike already operates a plant in the country, with more American and European companies to come. In the meantime, Vietnamese owned fabric and clothing outsourcing companies are popping up to supply the new orders from the United States that flooded the country after it joined the WTO a year ago.
Bill Gates is predicting Vietnam will become a major technology outsourcing center, and many of his compatriots in the technology sector agree with him. Intel is opening a plant in the country, as mentioned above, along with Phillips, Canon, Compaq, Emerson and Samsung.
All of the manufacturing plants moving into Vietnam require a large amount of infrastructure to support them. And as a former Asian backwater, Vietnam does not already have that infrastructure in place. The county is desperate to build up its infrastructure in time to attract foreign companies and new factories. And Vietnamese construction companies are building roads, bridges and power plants as fast as they can.
But we’re way ahead of the curve here. And Vietnam doesn’t have very many options open for foreign investors looking to grab profits from its booming economy.
The best way to go is with a real estate investment fund. The U.S. still doesn’t have any funds listed on its main exchanges. But the pink sheets do. IndoChina Capital Vietnam Holdings Limited (ICVHF: OTC) is a closed-end investment fund based on Vietnamese property and securities.
IndoChina Capital IPOed on the London Stock Exchange just 10 months ago at the beginning of March. When it joined the exchange, the fund increased its capital to $1 billion, with help from investments by Tudor Funds, Deutsche Bank and Citigroup.
IndoChina Capital focuses on Vietnamese real estate. Besides real estate projects, it puts money directly into stocks on the country’s Ho Chi Min and Hanoi exchanges and is a strategic investor with the Mekong Securities investment bank.
Buy IndoChina Capital Vietnam Holdings Limited (ICVHF: OTC) under $10 based on the fund’s strategic position as the first Vietnamese company on the London Stock Exchange and the booming Vietnamese economy.
This is a long-term investment. Hold onto this stock until the rest of the investing world catches on. Look for an investment horizon of several years.
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