Though Vietnam is on its way to becoming a market economy, it still has catching up to do
Investors who bought into the Chinese growth story early have done spectacularly well.
Over the past five years the iShares FTSE/Xinhua China 25 Index (NYSE:FXI), an index that tracks China’s 25 largest companies available to international investors, is up almost 110%.
Today, a “little China” has emerged. And it promises to make investors equally dazzling returns.
This country is a single-party Communist state, like China. And like China this country has undergone a serious of market-friendly reforms. China started this process in 1978 under Deng Xiaoping. This country embarked on its reforms in 1986 under a process known as doi moi (literally “renovation.”)
If you haven’t guessed by now, the country I’m talking about is Vietnam.
Though Vietnam is on its way to becoming a market economy, it still has catching up to do. Luckily, China has provided a useful roadmap to follow:
1) Use cheap labor to create an export driven manufacturing sector – Wages in Vietnam are between one third and two thirds of the levels in China, making it competitive for manufacturers.
2) Increase efficiency by privatizing state-owned enterprises – Between 1996 and 2007 the state-owned share of industrial output in Vietnam fell from half to around 20%.
3) Leverage a large population into a large domestic consumer class – Vietnam has a population of 89.5 million people, making it the thirteenth largest in the world.
Today, I want to dig deeper into Vietnam. I’ll also round out our examination of the “Next 11” economies – the 11 large-population emerging nations Goldman Sachs has predicted could one day surpass the members of the G7 as an economic power bloc.
We’ve already looked at Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan and South Korea. Today, we’ll focus on the final three: Vietnam, Turkey and the Philippines.
9) Vietnam
Many of Asia’s stock markets have shot up recently. But not Vietnam’s. This year, inflation concerns, a large trade deficit and a weakening currency have caused Vietnam’s benchmark Ho Chi Minh index to tumble nearly 14%. (Still 63% below its 2007 high.)
The good news is Vietnamese stocks are still cheap, trading on P/E of 10 (Compared and equivalent P/E of 13.5 for China and 20.1 for Indonesia.) That’s pretty decent considering Vietnam’s GDP growth target is 7%-7.5% for next year. I expect Vietnam to perform well over the next decade, as it picks up more and more manufacturing contracts at the expense of China, thanks to its more competitive labor force.
Conclusion: Vietnamese stocks are a definite “buy.” I expect it to be one of the best Southeast Asian performers of the next decade.
10) Turkey
The New York Times has described Turkey as “a fast-rising economic power, with a core of internationally competitive companies turning the youthful nation into an entrepreneurial hub, tapping cash-rich export markets in Russia and the Middle East while attracting billions of investment dollars in return.”
Turkey is the world’s eighteenth largest country by population. One easy way of measuring national wealth, GDP per head at purchasing power parity, is $12,466 – about half that of New Zealand.
In the past, what’s kept investors on the sidelines from this “East meets West” market has been high inflation and political turmoil. Today, you’ll find a much different Turkey. Prime Minister Erdogan’s AK Party has inspired confidence in the Turkish economy. Inflation hovers at about 7%. And growth is the strongest in the region. (Turkey grew more than 10% in the first half of 2010, rivaling China.) Even better, the Turkish stock market is still on a relatively low P/E of 12.3.
Conclusion: High growth projections, a young population and a relatively low P/E make Turkey a definite “buy.”
11) Philippines
Like China, India, Vietnam and Indonesia, the Philippines has a relatively cheap labor force. And like these Asian neighbors, it has a large population (almost 100 million) and a high GDP growth rate (7.3% this past year). Problem is much of this growth is already “priced in.” The country’s stock market trades on a relatively high P/E of 21.4 (higher even than booming Indonesia).
The Philippines used to be Asia’s second richest economy, after Japan. But following the disastrous dictatorship of Ferdinand Marcos (1965 to 1986) crony capitalism is rife. The country has one of the worst corruption scores in Asia from Transparency International, after only Cambodia, Laos and Burma.
Conclusion: Although the Philippines has some positives, a lofty P/E and too-high corruption levels make it a “hold” for now.
