Reconfiguring globalisation: Vietnam is the big winner Reconfiguring globalisation: Vietnam is the big winner Reconfiguring globalisation: Vietnam is the big winner

Reconfiguring globalisation: Vietnam is the big winner

Equities 10 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  Vietnam has become the big winner since 2013 as China has increasingly lost out in light manufacturing and with the trade war since Trump won the US election in 2016 accelerating the pace. The past two years with the Covid-19 pandemic and now recently the war in Ukraine have cemented the need for more robust global supply chains and companies in developed countries will turbo-charge big changes in global supply chains. The big winners are Vietnam, India, and Mexico, and in today's equity update we zoom in on Vietnam and its equity market.


World trade peaked in 2008 starting a new trajectory for the world

In 2008, the world economy hit an all-time high on world trade in percentage of GDP in which it has never recovered from. In hindsight it was an important signal in the noise around the financial crisis and the subsequent crisis years with the euro crisis and anaemic growth in the developed world. China was on the rise and due to its enormous stimulus it pulled the world out of its slump in 2009, but the dominos were already set in motion for where we are today.

Starting in 2013 the world economy was starting to reconfigure global supply chains. In China, wages had grown 15% annualised over a 24-year time period from 1989 to 2013, which were beginning to erode some of China’s competitive advantage in light manufacturing. Wages in China have since 2013 grown by 9.8% annualised. The Chinese leadership was taking notice as the country was beginning to lose market share to countries such as Vietnam, India, and Mexico, and it initially led to direct policies of transforming China from being export-driven to a more domestically and consumption-driven economy. Recently this strategy has been refined through its self-reliance strategy emphasising the goals of becoming more self-reliant on manufacturing of advanced industrial components.

From 2013 and on companies in the US and Europe were already slowly diversifying their manufacturing network moving light manufacturing away from China. When Trump was elected President of the US in 2016 drumming up a trade war with China he was in fact just accelerating a change which was already under way. In November 2017, Trump held a speech at the APEC CEO Summit where he drew the contours of the future calling for a “peaceful, prosperous, and free Indo-Pacific”. The speech set the alarm bells ringing in Beijing and China made plans accordingly. Ever since this speech the reconfiguration of the global economy has accelerated.

The pandemic and war in Ukraine is the rocket fuel for deglobalisation

The pandemic showed companies that a relentless focus on over-optimisation of supply chains with just-in-time and low inventories coupled with letting economics of scale dictate decisions were small gains over the years lost during a tail-risk event such as the pandemic. China’s zero case Covid policy has caused severe supply constraints for two years now and lockdowns have shown why having all of your manufacturing in one factory or one country is a dangerous game to play; the new keyword for businesses is resilience.

Just as the world was healing from the pandemic Russia decided to invade Ukraine unleashing another round of fragility as global commodity markets have been roiled in chaos ranging from supply of metals to wheat feeding the world’s population. The 24 February 2022 when Russian tanks rolled over the border to Ukraine will go down in history as a key date, as that was the date when new trajectories for technologies, national strategies and global supply chains were accelerated. Larry Fink, the CEO and co-founder of BlackRock, said last week in the FT that the Ukraine war marks the end of globalisation, but he is 14 years late on that observation. We have pretending for years that the globalisation we set out to create, starting in the 1980s and accelerated by China’s adoption in the WTO in 2001, was intact and could be kept alive. The past two years events will accelerate tremendous change in the world and one of the big winners is Vietnam.

Vietnam is the big winner as global supply chains are reconfigured

The US consulting firm Kearney has reshoring index tracking the reshoring of US manufacturing since the financial crisis. In its latest report, it shows how US manufacturing has come back since 2008 and accelerated since 2013. Even before the pandemic, China was rapidly losing market share in terms of global exports to the US with other low-cost countries in Asia gaining market share with Vietnam being the big winner. According to the Observatory of Economic Complexity (OEC), in 2020 the US was the end destination for Vietnamese exports for 25.6% of total exports up from 17.3% in 2013. China is 16.5% of exports in 2020 showing that Vietnam is increasingly becoming a country supplying the US and China with key components in broadcasting equipment, integrated circuits, telephones, textile footwear, clothing and furniture.

Source: OEC

Vietnamese equities have done well since early 2013 up 9.7% annualised with an impressive rebound since the lows during the pandemic (see chart below on the Xtrackers FTSE Vietnam Swap UCITS ETF). Note on the chart how 2013 was the year the wind changed for Vietnam starting its almost 10-year bull market following a brutal decline during the years 2008-2012 with Vietnamese equities losing as much as 69%. The growth trajectory for Vietnam looks rosy but is it too late to jump on the bandwagon?

Source: Saxo Group

During the period 2010-2022 Vietnamese earnings have underperformed the MSCI World only increasing 50% over 12 years whereas MSCI World earnings is up 180%. If we zoom in on the most recent period covering the trade war between the US and China, which really benefitted Vietnam, we see Vietnamese earnings rising by 170% compared to only 80% for the MSCI World. Vietnamese equities are not cheap priced at only 1% dividend yield but this equity valuation is a function of 18% annualised growth in earnings since early 2016.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.