12 November 2024

Vietnam Enterprise Investments Limited

("VEIL" or the "Company")

Quarterly Insights

VEIL is a London listed investment company investing primarily in listed equities in Vietnam and a FTSE 250 constituent.

Vietnam's Opportunities and Challenges in the Wake of Trump's Election Victory

Mr Tuan Le, Lead Portfolio Manager

The implications of Donald Trump's re-election for Vietnam's trade-driven economy are complex, with a potentially accelerated shift in US economic policy toward national competitiveness likely to inject volatility and uncertainty into emerging markets.

Equity Market Outlook

In the years leading up to the pandemic under Trump's first term, Vietnam's equity market delivered strong performance, with net profit growth reaching 19.1%. However, the unpredictability of Trump's policies and public statements heightened market volatility, leading to a discount on valuations despite underlying earnings growth. During this period, the VN Index achieved a compounded return of around 15%, slightly trailing profit growth due to those volatility concerns.

While Vietnam's economic and trade outlook remains relatively positive, supported by pro-growth domestic policies, the potential strengthening of the dollar could increase foreign selling in emerging markets in favour of US equities. Emerging markets, including Vietnam, may continue to see valuation discounts, as was the case during Trump's previous term.

Consequently, expected returns in Vietnam's equity market may lag earnings growth. While this risk is notable, the valuation of our Top-80 universe of stocks remains at 11.6x based on projected 2024 earnings, compared to the five-year historical average of 13.9x, suggesting limited room for further de-rating due to support from domestic investors seeking value. The extent to which Vietnamese investors can offset the potential continuation of foreign outflows, already over US$3 billion year-to-date, will be an important factor in the medium term.

Domestic interest rates can also play an important role in supporting local equity flows. Retail deposit rates for 12-month terms are at near all-time lows of approximately 5.7%, making term deposits less attractive compared to potential equity market gains, likely encouraging investors to favour equities. While rates are expected to stay stable as the government supports economic growth through a lower rate environment, potential shifts in Trump's renewed agenda could introduce additional uncertainties.

Currency Concerns

Exchange rate stability has been a focal point of US monitoring in recent years. In 2020, the US Treasury labelled Vietnam a currency manipulator, citing Vietnam's high trade surplus, a strong current account, and foreign exchange interventions. Although this designation was removed in 2021, Vietnam remains on the US Treasury's monitoring list.

To counter concerns about competitive devaluation, the Vietnamese government has taken clear steps to prevent excessive devaluation of the dong. Since 2022, the State Bank of Vietnam has deployed over US$20 billion in reserves to stabilise the currency, signalling its commitment to exchange rate stability and allay concerns over competitive devaluation.

Potential Impact of New Tariffs

Trump's election could reintroduce high tariffs and renegotiations of trade agreements, thereby amplifying market volatility but simultaneously enhancing Vietnam's role as an alternative manufacturing hub.

Trump's economic agenda, including tax cuts, deregulation, and increased deficit spending, may strengthen the dollar, which presents a mixed scenario for Vietnam's capital markets and export-oriented sectors. These sectors may face heightened trade barriers but could also benefit from redirected trade flows due to shifts in global manufacturing.

Among Trump's proposed policies are a 60% tariff on Chinese imports and an additional 10-20% tariff on imports from other trade-surplus nations. While a blanket tariff on all imports is unlikely given the potential impact on US consumers, we believe targeted tariffs on sectors with high export volume to the US may become a reality. Vietnam, with a strong presence in industries like electronics and textiles, may be at risk of such targeted measures.

To offset potential trade restrictions, Vietnam could work toward narrowing its trade surplus with the US by increasing imports of high-value goods such as aircraft, energy, and technology, contributing to a more balanced trade relationship. The government is also actively addressing transhipment risks, particularly for goods suspected of being re-routed through Vietnam to bypass US tariffs on Chinese products. For instance, Vietnam's Ministry of Industry and Trade has launched investigations into steel imports from China and South Korea to deter illegal re-export practices and reinforce its commitment to legitimate trade.

Implications for the Road Ahead

With China accounting for 32% of global manufacturing and Vietnam at 2-3%, Trump's re-election may prompt further shifts in supply chains away from China. As new trade barriers pressure Chinese exports, countries like Vietnam are positioned to benefit, much as they did during Trump's first term. However, this opportunity comes with a likely increase in scrutiny of Vietnamese goods, particularly in sectors with strong FDI links to China or those at risk of transhipment issues.

On balance, the outlook appears positive for Vietnam, with opportunities to capture a larger share of the global supply chain as production diversifies. Vietnam's government is expected to take proactive steps, drawing on experience to implement pre-emptive measures. This environment could provide momentum for key policy shifts, such as formal agreements with the US to clarify rules of origin, address transhipment concerns, and promote accelerated localisation within Vietnamese industries. Greater localisation would strengthen supply chain resilience and create the potential for domestic firms to move beyond OEM manufacturing toward capturing more value in direct-to-consumer markets.

Top Ten Holdings (59.4% of NAV)

Source: Bloomberg, Dragon Capital

NB: All returns are given in total return USD terms as of 30 September 2024

For further information, please contact:

Vietnam Enterprise Investments Limited

Rachel Hill

+44 122 561 8150

+44 797 121 4852

rachelhill@dragoncapital.com         

Jefferies International Limited

Stuart Klein                                                                                                                        

+44 207 029 8703

stuart.klein@jefferies.com 

h2Radnor

Iain Daly

+44 20 3897 1830

idaly@h2radnor.com

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