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Under the Banyan Tree – A status update for Vietnam?
511 Plays1 day ago
With Vietnam on the cusp of an index upgrade, Herald and Fred sit down with Asia Equity Strategist Prerna Garg for a look at what emerging market status could mean for the country, and how it's served former frontier markets in the past.
Disclaimer: https://www.research.hsbc.com/R/101/pxpfNfB
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Transcript
Podcast Introduction
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
00:00:24
Speaker
This podcast was recorded for publication on Thursday the 4th of September by HSBC Global Investment Research. Analystifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Vietnam's Economic Focus
00:00:45
Speaker
Welcome to Under the Banyan Tree, where we put Asian markets and economics in context. I'm Harold van der Linde, Head of Asian Equity Strategy here at HSBC. And I'm Fred Newman, Chief Asia Economist. Today we're putting the spotlight on an Asian economy on the verge of a very significant status change.
Manufacturing Growth in Vietnam
00:01:02
Speaker
That's right, Fred.
00:01:03
Speaker
Vietnam is on the cusp of the transition from frontier to emerging markets. We're here to tell you how that could happen, what it might mean, and how that leap has served other economies and stock markets in the past.
00:01:14
Speaker
Our guest in the studio today is equity strategist Pernak Ark. Let's get the conversation started right here on the Levany Entry.
00:01:33
Speaker
A few things you might want to know about Vietnam before we begin. It's become a major manufacturing base in the past 20 years, with exports on average growing by 13% per year. It's also very ingrained into the global supply chains.
00:01:49
Speaker
to the point that more than half of Samsung's global smartphone production is now done in Vietnam. It's amazing, right? It's also set to be a top 10 global consumer market by 2030, overtaking the UK and Germany. that's ah That's quite significant as
Economic Transformation
00:02:05
Speaker
well.
00:02:05
Speaker
Settling up a business there has been streamlined and simplified, which goes well with the low cost of production in Vietnam. The population is also young, with a literacy rate of 95%, which is the same as in France, actually.
00:02:17
Speaker
Fred, that makes this a very interesting place. Absolutely. It is very hard to think of an economy that has had such a dramatic development history in the last few decades. Growth 8%, 9%. When did you then, mid-90s or so? Yeah, mid-90s I was there backpacking and… At that time, there were around 2,000, only 2,000 vehicles registered in the entire country. How many people live in Vietnam? So it's 100 million people. So you could walk across. There were no cars. You wouldn't ever a car. I remember. It was motorcycles. But now if you were in Ho Chi Minh City or in Hanoi, you couldn't walk across the street because it's just shop full with cars. So anyways, why has it developed so dramatically? Because they really...
00:03:00
Speaker
harness this manufacturing export model. So globally, every Samsung phone that you buy outside of China is actually manufactured in Vietnam.
00:03:12
Speaker
Apple has moved a lot of production there. So it's no longer about coffee and rice and apparel, for example. They they are now the workshop of the world. They are. But what's the, I mean, other countries could have done this as well. What's the secret sauce? Why has this worked so well in Vietnam?
00:03:26
Speaker
Well, they did stuff that every economy should be doing, which is emphasize infrastructure and yeah openness and harbors, the hard stuff. But also I think what's different in Vietnam is very impressive human capital. And so if you look, for example, at the education levels,
00:03:44
Speaker
ah There are surveys internationally that compare what high school students are doing. And Vietnam consistently ranks at the very top of these surveys. And that's where developing countries are very, very impressive. That's right. And they also invest in teacher training and and these sort of things. So they really said this is important to us more so than other countries. Yeah.
00:04:03
Speaker
not as and And so as a result, within Southeast Asia, Vietnam has now been for quite some time probably the star performer. I mean, of course, Singapore is very impressive. Malaysia is doing quite well. But Vietnam is really the came from behind and the kind of you know the years yeah keeps pushing ahead.
00:04:19
Speaker
Now, here's a question for you, Harold, though, because as an economist, I can talk about very impressive economic development stories. And we have them particularly in Asia today. But at times, that's not always reflected in the return for financial investors.
Growth vs. Market Performance
00:04:36
Speaker
That is, I can have 8%, 9% growth per year for 20 years, yeah but it doesn't mean that, say, the equity market rises the same at the same pace. no Why is that? Why is there this this disconnect sometimes between disappointing equity market performance over a couple of decades and this very impressive development story? Yeah.
00:04:54
Speaker
Well, I would almost say sometimes it's good that we have that because that's why we need equity strategies to say, OK, this is what the economy say. But how is the stock market going to perform? And the thing is, if you have a let's say the economy is growing and everybody buys a particular product, make it bread.
00:05:11
Speaker
But if there are thousands more bakeries, it means that each individual bakery is not going to make that much money. So issues like competition or regulations, to be honest, also in emerging markets, you might invest in a company that is, for example, in Vietnam or any other country.
00:05:26
Speaker
But if the owners pay themselves very good packages and fly first class everywhere and have salaries that are exorbitantly high, they take the money out for themselves. And you as an investor really get Corporate governance is what talking that's corporate governance. So these issues like yeah competition, corporate governance, regulations, they differ between countries. They change over time, of course, as well.
00:05:47
Speaker
And they determine how much of these profits really come to you as an investor. And sometimes that is very low. We've had good economic growth stories, and but actually stock market are not so good, actually. You could argue, for example, China was there for a long time. But we've also had markets where growth was good, but the stock market did even better. India, for example.
00:06:06
Speaker
Is it also the case that in some economies you just have very small stock market and so global investors can't really access it? You can't really – there's just too small to invest and so therefore the market never really develops. It's never really on the map of global investors where they can't access it because it's just too small and too illiquid. Yeah, exactly. So there might be a stock market, I'm just making up a country, but somewhere in the world, ah but Papua New Guinea maybe, that is too small, people don't really look at it. And it's not developed, it's difficult to buy, it's you can buy a couple of trades, but if professional investors can't, and pension funds, they can't really come in.
00:06:41
Speaker
We call them frontier markets. And there are specialized investors that look at that, frontier market funds. But if you as an economy are growing, you want to have a stock market that functions.
00:06:52
Speaker
Why? Because if your economy is growing and you're that bakery, you say, listen, I need to expand. I need to have 10 bakeries. So you go to the bank, but you can't always go to the bank and borrow. You need to then eventually say, I'm going to sell shares in the stock market.
00:07:05
Speaker
Then you need a stock market that is properly functioning, where an investor knows that if he buys something, it's his. Where a regulator says this is how it trades and these sort things. Now, that we call an emerging market or sometimes the market. Now, let me stop you here because kind use these terms frontier markets and...
00:07:24
Speaker
emerging markets. And and maybe this is a great point to bring Perner actually into the conversation.
Market Status Upgrade
00:07:29
Speaker
Perner, obviously, ah you are the brains behind Harold's thinking on on Asia equity strategy. Absolutely. And you've done a lot of work on Vietnam lately. And you talk in your research about this idea that Vietnam might graduate from a frontier market to an emerging market.
00:07:47
Speaker
Who decides that label? Where does it come from? What's sort behind that? So there are two index providers, like two famous index providers globally, FTSE and MSCI, that classifies these various markets into the categories like frontier markets, um emerging market and developed market, depending on the growth status of these markets, like you know how mature they are.
00:08:08
Speaker
They profile these markets. The systems they use. They use. How much people can trade and these sort of things, Vietnam for now was in frontier category and not emerging because it did not have a very mature infrastructure, equity infrastructure, like, you know, the trades would fall. And so because of these trading restrictions, FTSE, one of the index provider, had categorized Vietnam into frontier market.
00:08:31
Speaker
But now Vietnam in last few years have done a lot of work to upgrade their systems. And now, hence in October, FTSE would reconsider whether they should upgrade Vietnam from frontier market into emerging market. This is important because it means that these companies, like the bakery example, can suddenly say, listen, I want to grow. I can now approach global investors and say, can you invest in me? And then I'll use that money to expand my business. So, so so so so yeah, after the upgrade, a lot more investors, global investors, like pension ah funds and brokers, they look at the emerging market because they ah they believe that the risk associated with these markets are a bit lower compared to frontier markets. And it's mostly local investors at the moment. and As of now, like, you know, more than 80% of trading in Vietnam just comes from domestic investors. So when you get more foreign investors looking at the market, it diversifies the investor base. When a new company gets listed, it becomes easier for that company to
Impact of Emerging Market Status
00:09:25
Speaker
raise funding. So it comes with a lot of merits for the economy. So so you're saying Vietnam gets into these new indices and therefore...
00:09:33
Speaker
It's no longer frontier markets now an emerging market. Can you quantify how much new money might therefore flow into Vietnam? yeah is it and And what's the basis of that calculation? ah So when Vietnam, if Vietnam gets added to the emerging market status, it might get added at the weight of 0.5 percent in the index, like, you know, all the emerging market. The size of Vietnam would be around 0.5%. So it'll be quite small, but that's how most of these smaller economies or markets start.
00:10:01
Speaker
And this could lead to around 2 billion US dollar of fresh inflows into market. For the size of Vietnam, it's quite strong in the near term. That's fascinating. So what we're discussing here really is that a new designation – New recognition. Recognition by the international you know index community then opens the potential for a country like Vietnam to attract more capital, which would then help also its development.
00:10:28
Speaker
Maybe this is a great place to take a quick break. And when we come back, I want to really hone in on what it takes to sustain then that investor optimism to generate returns that ultimately are in line with economic growth. Because that's the puzzle here. yeah
Sustaining Investor Optimism
00:10:45
Speaker
I want to get it. Why do some of these countries not deliver the same financial returns as they do economic returns?
00:11:00
Speaker
So welcome back. um And before that break, we really discussed this idea that some financial returns in emerging markets don't always match economic returns. yeah um And Harold, in general, that's obviously a factual observation because empirical observation, we've seen that over time.
00:11:18
Speaker
What would it take? for markets then emerging markets to generate the financial return? What would you want to see as an investor where you could then say, well, this economy would potentially deliver the financial returns that are in line with the economic growth that it generates?
00:11:36
Speaker
now yeah you You need, of course, the hard infrastructure that Prunin mentioned. you right You need a stock market you can trade that you can also believe that the numbers you get from a company is good and and these sort of things. And if the company does something that's illegal, that you actually take them to court and these sort of things.
00:11:50
Speaker
But what is also important is that these companies are the ones that really benefit from the economic growth. You can have 10 oil companies listed in Vietnam, but if the export growth comes from the technology sector and that's not listed, other it doesn't go anywhere.
00:12:03
Speaker
So we need those companies that actually grow going to the stock market. and make sure that the profits that they generate goes to you as an investor and that they make those profits. um Because you can have a lot of technology companies, but if there's a lot of competition, as I said, yeah then maybe there's not a lot of money. This is one of the issues why China did not perform so well. There's so much competition in China that the individual companies didn't grow as much, although the overall economy did.
00:12:29
Speaker
so So some of it that you mentioned is also just a result of just market forces, right? Yeah, absolutely. But Perner, then for you, if you think about Vietnam, what would be some of the things that the Vietnamese government or the stock exchange could do to kind of enhance the future return prospects?
00:12:47
Speaker
and And is there risk of them maybe falling behind again? So, um um Fred, as I mentioned, Vietnamese regulators have done a lot to improve the system, the equity system in Vietnam, but they need to do a lot more.
00:13:00
Speaker
For example, there are a lot of sectors in Vietnam where there are caps on how much foreign investors can invest. And this has been raised as an important issue by the foreign community in the past because they think it limits their access to the market.
00:13:14
Speaker
The same way if the upgrade happens, it happens on the expectations that they will keep on updating their system, have new trading system in place in coming years. It took Vietnam 10 years to get the current trading system running. So from here, if they get upgraded, they have to be really swift with like you know making sure that all the developments and whatever they need to do, they do it regularly.
00:13:37
Speaker
Otherwise, we've had examples in the past, for example, Argentina and Pakistan, they were upgraded by index providers from Frontier into emerging market status, but they could not catch up. Either the market was not liquid, the forex market had issues, and because of which they were eventually dropped back to the Frontier status. So just getting upgraded to EM does not do the It's guarantee to stay there. And they have make sure that they... But there is a sort of mindset in Vietnam that they want to make this happen, right? They've really gone out of their way to try to meet all the requirements that the FTSE and the MSCI is putting Yes, because it helps them a lot. It puts them on the... It's a requirement for them to grow further. Yeah, but listening to you too, which is a reminder...
00:14:19
Speaker
Yes, we can talk as economists about economic fundamentals, infrastructure, education, high growth rates, but it takes a lot more finer things, market infrastructure, corporate governance, regulations, institutions to translate this also into future financial returns, which, by the way, ultimately feeds back into then-the-growing improve growth performance
Market Infrastructure Importance
00:14:43
Speaker
as well. So, ah Harold, I have a sneaking suspicion here that after 19 years working in financial markets, I finally appreciate what you as an equity strategist bring to the table. Yeah, economists are slow to the game very often with these things. But you're right. This is exactly what the equity strategy does.
FTSE Decision Anticipation
00:15:01
Speaker
yeah And we've got something to look forward to, the October decision um by MSCI, by FTSE, to whether or not to include Vietnam into or designate Vietnam as an emerging market.
00:15:15
Speaker
Well, that's all we've got time for in today's episode of Under the Banyan Tree. Many thanks to you, Perna, for joining us and much love to all our listeners, as always. And if you haven't yet subscribed, we're on your podcast platform of choice every week alongside our sister podcast, The Macrobrief.
00:15:30
Speaker
We'll be back again next week. Take care till then.
00:15:55
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.