Over the past few decades many firms have been investing into China, drawn by its cheap labour and huge market. However, it has been gradually losing its cost advantage and competitiveness in comparison to other ASEAN countries. 
As the Covid-19 pandemic causes many companies to reconsider their supply chains and look to diversify their operations by adding another location in Asia, there is anticipation that Vietnam could benefit from those looking to economically de-couple from China and move supply chains out.
This rising south-east Asian nation has won international praise for its effective handling of the coronavirus pandemic, with just over 300 cases and zero deaths, and looks to be entering 2020 with stronger demographics and macroeconomic footing than most.
Michael Kokalari, chief economist at the VinaCapital Vietnam Opportunity trust, said: “While all investors say they are looking at the long term, at the end of the day everyone’s focused on the next 18 months, and Vietnam is unambiguously, from real economic point of view, the country that is going to do probably the best in the world.
“I can’t think of any other country in the world that in real economic terms is going to come out of all this as good as Vietnam.”
He argued that Vietnam will come out as a leader in the post Covid-19 recovery, especially as the need to de-risk supply chains becomes even more prevalent.
“In the middle of the trade war, we had already been moving factories from China to here and that’s going to accelerate after all the medical issues pass,” Kokalari explained.
He said multinational companies, out of their own interest, are probably going to do a lot more to help build out local suppliers and local supply chains.
“Before you had guys like Samsung, Panasonic, essentially making use of the cheap wages but the more sophisticated stuff was brought in or they brought their own supply chain with them,” Kokalari said.
“What will you see going forward is that multinational companies will have much more incentive to help build out a more robust supply chain, because now they really have to get off of China.”
Long before coronavirus, Apple had already recognised that it was over-reliant on China and as early as 2015 proposed to relocate assembly of at least one product to Vietnam, according the WSJ.
Kokalari said: “People thought they had a global supply chain, but actually they had a China supply chain. That’s all over now given how China handled it.”
As companies like Panasonic and Apple expand their operations and move factories to Vietnam, the country could be poised to benefit from the increasing tensions between the US and China.
VinaCapital Vietnam Opportunity’s managers see this as a major catalyst in the near term for Vietnamese firms.
While lot of money has flowed out of south-east Asian developing markets as a result of the pandemic, Khanh Vu, managing director of the VinaCapital Vietnam Opportunity trust, said: “We’re not seeing a level of outflows that we’ve seen in other developing markets in the region.
“A lot of investors have spent a lot of time trying to access this market, these are not going to be the first positions that they trim.”
Despite the fact that corporate earnings nationwide took a big hit as a result of the lockdown, the managers of the trust believe that the current GDP estimate of 1.7 per cent, a positive number for the year, will be a stark contrast to other nations around the world who are preparing for severe economic contractions.
They reckon that investors worldwide underestimate the severity of the impact, especially given that Vietnam’s firms are forecasting 2-10 per cent earnings contractions, even though they had one of the shortest lockdowns.
However, Vu said the virus did cause valuations to come down to a far more reasonable level, and the trust used the market bounce to sell out of some publicly listed companies to put towards new investments. The Vietnamese market is up around 28 per cent since it bottomed in March.
MSCI Vietnam performance year to date
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Source: FE Analytics
Vu said that the kind of businesses the trust prefers are those with defensible moats, resilient to competitors, economic cycles or pandemics, an example being the Airports Corporation of Vietnam, the third largest holding in the portfolio.
“They’re a very interesting story. We love infrastructure, we love a good monopoly,” Khanh said. “You’ve got a natural moat, something that’s quite defensible. For Airports Corporation of Vietnam, they run and operate 22 airports in Vietnam. You can’t build 22 airports.”
Vu said the opportunity to invest came about as part of the government’s privatisation. “When we started in 2003, there were around 15,000 to 20,000 state-owned companies, today there’s less than 2000,” he said.
“When this company became public, we had an opportunity to participate very early on. They offered a very little bid to the public market.
“When we entered it was less than $1bn, it’s about $4-5bn today. It still has quite a runway to get back to pre-Covid highs, but it’s a company that will succeed once air travel and flights and services resume.”
The managers also pointed to the high level of infrastructure spending, one of the highest in the region, and said that it bodes well for companies in the construction material space, highlighting Hoa Phat Group, the biggest holding in the portfolio.
They hailed the firm’s profit growth forecast for this year was 26 per cent, given the whole market is seeing a negative 2 per cent profit contraction due to Covid-19.
“Fiscal spending, infrastructure spending is the easiest lever that they [the government] can pull to try and push up economic numbers,” they explained.
“Whether you believe their figures, they’ll probably try and nudge it closer to that number, and one of the lowest hanging fruit for them will be infrastructure spending.”
Performance of VinaCapital Vietnam Opportunity over five years
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The VinaCapital Vietnam Opportunity has made 107.57 per cent over the last five years compared with 56.44 per cent from the MSCI Vietnam index. It is trading at a 21.74 per cent discount to net asset value (NAV) and has ongoing charges of 1.17 per cent.