Emerging Markets: Into Vietnam, along with Coca-Cola, Exxon Mobil, and McDonalds

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As I have always said, if you want to know where to invest in the developing world, all you have to do is to follow Coca-Cola (KO). In fact, Coca-Cola is doing something pretty ingenious in Vietnam. The company offers a set of functional caps which can transform an empty bottle into a water gun, pencil sharpener, night light and other items once the beverage has been consumed.

Exxon Mobil (XOM) is also in Vietnam with plans to invest $20 billion in a gas-fired power complex. Together with Vietnam’s state-owned Petro Vietnam, the company will build two power plants with capacity to generate between 6,000 and 6,500 megawatts of power.

Any list of the top five developing countries in Asia must include Vietnam. Importantly, Vietnam has a robust middle class, which I think is one of the crucial drivers of economic expansion for any developing nation. In many cases, it's the middle class that supports the policy changes necessary to move a country successfully towards capitalistic democracy. Just look at what’s currently happening in India and what’s not happening in South Africa.

Vietnam has the fastest-growing middle class in Southeast Asia. It is expected to more than double in size from 12 million today to 33 million in 2020, according to a survey by the Boston Consulting Group. However, those numbers do not make the middle class dominant, considering the 2020 population is expected to top 100 million.

That said, it's by no means certain that the rise of the middle class in Vietnam will help recover the country's dynamic economy, since the fundamental political problems in Vietnam—between the middle class and the communist government—are philosophical in nature.

Meanwhile, China's direct investment in Vietnam soared 7.1-fold to $2.27 billion in 2013 on an approval basis. This put China ahead of Japan and behind only South Korea and Singapore as the largest foreign direct investors in Vietnam. However, Vietnam shares both a common border and common animosity with China. Distrust of China tends to run deep, a result of three hundred years of armed conflicts, including China's 1979 invasion of Vietnam that killed an estimated 40,000 on both sides.

Now, despite China’s billions of investment in Vietnam, political and military tensions are on the rise between China and Vietnam. Recently, Vietnam prepared a lawsuit against China for erecting an oil rig in a part of the South China Sea that remains disputed waters. Additionally, a Vietnamese fishing vessel sank after a collision with a Chinese boat in the same disputed waters. This has led to violent demonstrations against the Chinese in Vietnam and has turned violent with the burning down of a Chinese shoe factory.

Simultaneously, economic ties between Japan and Vietnam are growing. There are a number of high-profile projects backed by Japanese companies, including the $2.8 billion Nghi Son petrochemical oil refinery, the $650 million Bridgestone Corp. project and the $175 million Panasonic Industrial Devices project. And Japanese Prime Minister Shinzo Abe recently pledged support for Vietnam and the Philippines in their maritime disputes with China. Speaking in Singapore, Abe said his country would help to “thoroughly maintain freedom of navigation and freedom of overflight.”

While China is Vietnam's largest trading partner by a substantial margin, it is not responsible for the largest share of exports or of foreign direct investment. Vietnam's major export markets are, in size order, the EU, U.S., the ASEAN countries, Japan and China.

In 2012, the top three countries investing in Vietnam were Japan ($5.13 billion), Singapore ($1.72 billion) and South Korea ($1.17 billion).

Vietnam is an increasingly important manufacturing base for electronics companies. For instance, South Korea's Samsung Electronics Co., Ltd. is considering investing more than $1 billion in a third consumer electronics factory there.

Still, there are ties that bind. As wages rise in China, many Chinese businesses have moved their production to lower-cost Vietnam. To pave the way for these relocations, both sides have agreed on reforms to ease cross-border investment.  And, in recent years, Beijing has loaned more than $1 billion to Hanoi for infrastructure development.

Investment opportunities in Vietnam are limited. The single ETF is Van Eck's Market Vectors Vietnam ETF (VNM), which owns shares of 29 industrial, financial and oil/gas/energy companies. Two Vietnamese companies provide investment opportunities for intrepid investors. Dragon Capital, which claims to be the second-largest investor in the Vietnamese stock market after the Vietnamese government, offers two closed-end funds. Vietnam Asset Management Limited offers four Cayman-registered Vietnam-specific funds, which are open to public and institutional investors globally.

I began this article with Coca Cola and Exxon Mobil, and I will end it with another iconic American brand, McDonalds. Last February McDonald’s (MCD) opened its first location in Ho Chi Minh City (formerly Saigon). Vietnam is already home to restaurants from McDonald’s rivals, including Burger King (BKC) and Yum! Brands (YUM) subsidiary KFC. So, the conclusion I draw is this: While there may be issues with the banking system that have yet to be resolved, there’s a population of 98 million who want to move ahead in life and they’re not sitting idle—they’re consuming!

Peter Kohli
pkohli@dmsfunds.com | 484.671.3011

Learn more about DMS Funds here | Visit us on Twitter




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Economy , ETFs

Referenced Stocks: KO , MCD , YUM , VNM , XOM

Peter Kohli

Peter Kohli

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