Is Vietnam considered an emerging market? What is an emerging market anyway?
Back in the early 1980s, from a political “Western” perspective the world was geo-politically divided into three main areas: the first world, mainly Western hemisphere countries – divided by the imaginary line of the Iron Curtain – which were pro-US and pro-capitalism; the second world, mainly Eastern hemisphere countries, pro-USSR and pro-socialism; and the third world, economically poor countries, mainly in the Southern hemisphere, many under dictatorships.
From an investment perspective there were only two large areas: developed countries (first world) and underdeveloped countries (third world). Fund managers trying to attract investors into their “underdeveloped countries” focus funds had many difficulties as the term has an obvious negative connotation. By 1981 the International Finance Corporation (IFC), a for-profit part of the World Bank, came up with the idea of calling these countries “emerging,” a word that almost implies guaranteed growth. Add “emerging” to an investment, and suddenly it rises in respectability and becomes more convincing as people now have the illusion of a strong causal link. Also, having a positive word for something helps spread awareness of it.
With the dissolution of the USSR in 1991, the second world ceased to exist. From an investment perspective now two levels of emerging markets existed: the first level, countries with stock and bond markets with enough liquidity; the second, with or without markets and very little liquidity. In 1992 the “frontier” term was coined by the same organization – IFC.
Today, is Vietnam classified as emerging or frontier? There is no clear answer. Some fund houses choose emerging, others frontier. The main difference I have noticed was in late 2006 when Vietnam signed the World Trade Organization agreements, and most fund houses ‘promoted’ the country to the status of emerging. In 2007, legions of investors were not only hyping Vietnam as the next China but also, relatively speaking, throwing more money at it than they had ever thrown at China. At its peak in 2007, the investment (direct and indirect) produced a net inflow of USD17 billion in an USD80 billion economy – a ratio four times higher than China ever achieved. At the time the total value (shall I say overvalued?) of the stock market was around USD25 billion.
A reality check soon arrived and by 2008 the bubble burst, proving that fund houses and investors were jumping too high, too fast. Since then foreign money fled Vietnam, which is now starved of the capital it needs to get its roads and other basic infrastructure in shape. At this stage Vietnam is realistically classified as a frontier market by many fund houses, while others still stick the emerging word on the fund name.
Bio: Afonso Vieira is an investment manager and financial planner. He is licensed by the Financial Planning Association of Singapore.
