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Vietnam is certainly well known for its coffee but few would know that today it is the largest coffee producer in the world having captured over 34% global market share. But this is not the only edible commodity where Vietnam is leaving its mark as it is also listed among the world's largest exporters of rice, pepper and shrimp. Slowly but surely this beautiful country, with its sizeable population of over 90 million people, has grown to become an important economic driving force in South East Asia. As mentioned in a recent report by Boston Consulting Group no other middle class in Asia Pacific is growing as fast as that of Vietnam. Even though GDP per Capita is still very low with USD 1'911, according to World Bank, one can clearly see that Vietnamese productivity has entered into an acceleration phase as the chart below indicates.

Vietnam: GDP per Capita

More than half of Vietnam's population is below 30 years old and is well known for its robust work ethic. When this is combined with the low wages and the high levels of human capital of the workforce the benefits presented to companies employing Vietnamese people is incredibly evident. Few realise just how well Vietnam is doing with its education but the results of the OECD sponsored PISA report highlights that the youth can go toe-to-toe with the likes of Germany and Switzerland whilst outstripping scores of countries such as the UK, USA and Australia in mathematics, reading and science.

PISA 2012

This little known fact is one reason why high-tech companies like Samsung, Intel, Nokia and Canon are shifting their production sites from China to Vietnam to lower cost and capture value in their manufacturing lines. Around 94% of Vietnam's 90 million people earn less than USD 2'000 per year and the picture becomes clear as to why when one looks at minimum wages in the region. As can be seen in the chart below the advantage of comparative labour costs is quite pronounced.

Comparative minimum hourly wage

But Vietnam has also experienced a few economic setbacks in the last decade, mainly due to difficulties in handling its rapid growth. But in my opinion the Vietnamese government learned from some of its past mistakes and is now committed to steer their economy on a solid path of sustainable recovery.

Nevertheless some critics often say the government is not doing things fast enough, but this is often the case in many countries. They are tackling all the right issues and these things take time. By no means is everything perfect, but they do have sound monetary policy, currency stability, inflation under control, interest rates going lower and bank issues being addressed with the creation of Vietnam Asset Management Company (a government agency) which has been tasked to solve the issues with NPLs (Non Performing Loans). Also it is very encouraging to see that FDI's (Foreign Direct Investments) are increasing rapidly – these are all signs of stability that should give confidence to investors.

Often people ask me how they can invest and take advantage of the Vietnamese investment story. Since Private Banks do not offer direct investment services into listed Vietnamese equities, the best solution is to invest through dedicated Vietnam Funds, either open end, closed end or ETFs.

A key difference between a closed-end and an open-end fund is that the number of outstanding shares of an open-end fund can vary, whereas shares of a closed-end fund are fixed in number. An open-end fund will issue new shares, or repurchase old shares, as needed to meet investor demand, depending on whether money is being added to the fund or shares are being redeemed.

The per share price is determined by the net value of all assets (NAV) held by the fund, divided by the number of shares. The per share price of a closed-end fund however, is determined by the level of demand and offer and it therefore can either have a premium or a discount to NAV. For example in Vietnam, where closed end funds historically traded at a deep discount to NAV have now narrowed the gap significantly, however open-end funds are still by far the most popular among savvy investors.

With an open-end fund, you can participate in the markets and have a great deal of flexibility regarding how and when you purchase shares. Also, you are never required to purchase shares at a premium or sell at a discount. Open-end fund managers have the flexibility to switch into cash in times of uncertainty or change their strategy to be overweight more defensive stocks.

ETFs typically have large assets under management and they all face the problem in Vietnam, namely that they only can invest in liquid stocks or large caps, where the foreign investor limit is not yet full. This issue restricts their investment universe to only a few stocks and hence limits their diversification level. ETFs suffered from this constrain in 2013, where the Ho Chi Minh index went up 20% and ETFs hardly moved.

If we look at valuations of Vietnam in comparison to regional peers, they also compare favourably, but it is probably worth noting, that there is a particular situation in Vietnam, where the valuation gap between the smaller stocks versus the larger stocks is too wide, and hence in my view this offers a great investment opportunity.

Vietnam compelling valuation

Vietnam's GDP growth is expected to be between 5.8% and 6% this year with an inflation most probably below 4%, which would be a new record.

To be the next China, as I think Vietnam can be, they will need to continue supporting growth and I think are capable of reaching 8% to 9% per year. Interestingly, Intel has recently stated that it took 14 years in China to adapt the workforce to match their methods, but only took 4 years in Vietnam. This is surely an encouraging experience for Intel and public relations like this is of course a big positive for Vietnam's future growth.

Investors looking for a taste of Vietnam, please feel free to get in contact with me and I invite you for a cup of Vietnamese coffee.

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Andreas Vogelsanger

Andreas Vogelsanger is the CEO of the AFC Vietnam Fund, which exclusively invests in Vietnamese listed equities to capture value in growth companies; especially in the small to medium size company segment. This fund is one of the funds of Asia Frontier Capital Ltd., Hong Kong which is a boutique fund management company that specializes in investing in high growth Asian frontier economies.

Andreas has worked over 25 years in Finance for various institutions, such as Investment Banks, Hedge Funds and Private Banks in Zurich, Geneva, London, Hong Kong and Singapore. He has an in-depth knowledge of financial products, such as Equities, Bonds, Foreign Exchange, Funds and Derivatives through his previous experience as an Instituational Sales, Trader and Investment Advisor. Andreas gained a clear understanding of Asian and European client needs through his active involvement in creating business strategies for these markets.

Prior to joining Asia Frontier Capital, Andreas was one of the Founding Partners of EVK Capital Singapore, a small corporate finance boutique. He also worked for Coutts Private Bank Hong Kong and Singapore where he was Head of Banking Products and Treasury Services in Asia covering Asset Liability Management, Foreign Exchange and Money Market, Securities Dealing, Customised Investments and Credit Solutions. As Coutts Asian Treasurer, he was managing the liquidity of the bank for the Singapore and Hong Kong offices. Andreas was a Managing Director for Bank Julius Baer in Zurich as Head of Structured Solutions and then relocated to Singapore to help to build up Julius Baer's presence in Asia as Head of Products.

Andreas was awarded an AMP diploma from Wharton Business School, University of Pennsylvania and he also holds CEFA (Certified European Financial Analyst and Portfolio Manager) and FRM (Financial Risk Manager) diplomas.

Website: www.asiafrontiercapital.com

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