Head of Saxo Strats
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.
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?
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.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
