30 September 2015

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Even by Asian city standards, crossing the road in Hanoi can be a daunting experience. The city’s legion of motorcycles zip through the Old City’s streets and alleyways weaving in and out of lanes seemingly with scant regard for the rules of the road. One wrong move and pedestrians run the risk of being knocked right over. The result? Many visitors become stuck on the footpath, not wanting to take that first step into the maelstrom.

For many years, Vietnam’s investment environment has looked very similar. Awash with confusing and overbearing regulation, a lack of much needed reforms and presided over by a government which prioritised growth above all other considerations, the resulting disarray kept all but the bravest investors on the side-lines. Yet, in much the same way that looking more carefully at Hanoi’s traffic patterns often presents a path through the chaos, recent moves by the government to bring some order and clarity to the economy is likely to raise Vietnam’s profile as an attractive investment destination.

At home and abroad

Growth remains one of the key positive factors. Unlike many of its ASEAN neighbours, Vietnam is forecast to continue posting robust positive GDP growth, estimated by CLSA at 6.3% this year and 6.6% in 2016. However, having learned from the overheating crisis of 2010/2011, the government is now ensuring these growth levels are achieved in tandem with macroeconomic stability. The imposition of an inflation cap and a mandated minimum foreign reserves level should help to steady the broader economy.

Vietnam boasts one of the highest levels of export growth in Asia and continues to take manufacturing market share from China. This is particularly noticeable in the foreign direct investment (FDI) dominated export manufacturing sector. Activity growth, as measured by the Markit PMI Index, reached a four year high in May this year with substantial gains in new orders and employment. FDI continues to be strong, particularly from foreign electronics manufacturers.

Things are also picking up in the domestic economy. We are seeing the first stages of a recovery in the property sector. Transaction volumes in the largest cities (Hanoi and Ho Chi Minh City) are up more than 2.5 times year on year, according to research house SSI. Increased consumer confidence is also being reflected in the almost doubling of new car sales year-on-year while a recent report from GfK Group highlighted Vietnam as one of the top five growth markets for electronics sales in 2015.

The state of enterprise

State-owned enterprise (SOE) reform is an area which has disappointed so far. SOEs dominate the Vietnamese economy and progress towards public ownership and increased transparency has been slower than many investors would like. However, next year’s party elections will see half the ruling Politburo replaced, potentially shifting the balance of power towards the more reformist wing, accelerating SOE reform and increasing the potential for foreign ownership.

So while Vietnam may not yet offer the smooth roads of some of its Asian peers, many of the factors that have deterred investors in the past are starting to be addressed. As this continues, BlackRock will be keeping a close eye on the economic traffic and assessing when it is time to take that first step.

CARS ref: RSM-2049

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 24 September 2015 and may change as subsequent conditions vary.

Vietnam boasts one of the highest levels of export growth in Asia and continues to take manufacturing market share from China.