Vietnam can get back to concentrating on the strong fundamentals of its economy, say fund managers Dragon Capital and VinaCapital, after Hanoi and Washington agreed a draft trade deal last week.

Hanoi’s draft trade deal with the US last week has reassured leading investors in Vietnam that the impact of tariffs will be less than they feared three months ago.

Dragon Capital, manager of Vietnam Enterprise (VEIL), said the potential economic hit from US tariffs was ‘far less severe’ than the 1.4%-2% contraction it first estimated after president Trump announced punitive import taxes on numerous countries on ‘Liberation Day’ on 2 April.

Following confirmation from the Vietnamese government on 2 July that ‘a framework for a fair and balanced reciprocal trade agreement’ had been reached with the US, the consensus is that a 20% average tariff will be applied to Vietnam’s goods, less than half the 46% Trump first proposed.

The VN Index, Vietnam’s stock market benchmark, did not respond much to the positive news. That reflected business concern that 20% was still high but also that the short-term economic impact is likely to be limited.

Rush to beat deadline

VinaCapital, manager of VinaCapital Vietnam Opportunity (VOF), said exports to the US were set to slow in the second half of the year having surged by nearly 30% as US retailers rushed to buy goods to exploit a 90-day pause announced by Trump after his proposals sparked a global backlash. Today the US extended the deadline by a month to expire on 1 August.

Secondly, foreign direct investment (FDI) into Vietnam had continued at very high levels, up nearly 50% to over $15bn in the first five months of the year, equivalent to more than 7% of GDP, VinaCapital said.

‘Pending a final agreement, as long as Vietnam’s tariffs are less than 10% higher than regional competitors, all of the advantages it had pre-tariffs in terms of workforce quality, costs, demographics and location continue to apply,’ it said.

Vietnam is the first country in Asia to reach a trade deal with the US administration.

‘Vietnam should continue to be an attractive destination for global manufacturers and FDI for years to come,’ VinaCapital added.

Dragon Capital said before 2 April Vietnam had effectively paid around 9.4% on US-bound exports, according to World Trade Organisation estimates. ‘Under Trump’s proposed 20% tariff, we estimate the additional burden is only 10.6%, just above the baseline minimum of 10%.’

Meanwhile the impact on Vietnam’s listed companies was also limited. Just 1.5% of the VN Index was linked to US exports, with ‘virtually no exposure to transhipped goods’ where the administration is cracking down to ensure exports from China are not switched to different ships to avoid higher tariffs.

Uncertainty remains as to whether only goods that originated in China are affected or whether it could also apply to Vietnamese products that use some Chinese parts.

‘The domestic economy accounts for over 85% of listed corporate revenues,’ said Dragon Capital, adding that banks, which make up 37% of the index and 60% of corporate earnings, had minimal lending exposure to export-linked FDI.

VinaCapital agreed: ‘We reiterate that Vietnam’s growth will be driven by internal factors such as increased public infrastructure spending, a resurgence of the real estate market, and significant administrative reforms and initiatives’.

Extraordinary economic growth

The latter is a reference to Vietnam’s recent ‘Doi Moi 2’ reforms to slash bureaucracy and streamline local government. The aim is to avoid what the World Bank calls the ‘middle income trap’ of countries that successfully emerge from poverty but struggle to move onto high income status.

The first ‘Doi Moi’ reforms in 1986 ushered in ‘an era of extraordinary economic growth’, Michael Kokalari, chief economist of VinaCapital said.

The managers’ optimism has been reflected in the rebound of their investment companies’ share prices. VEIL has done best, rallying 22.6% in the past three months, narrowing the discount of the £1bn closed-end fund to 15.7% compared to a one-year average of 21.5%, according to Morningstar data from Deutsche Numis.

The £577m VOF has climbed 12%, behind the 13.7% dollar return in the VN Index, with its shares moving to 19.8% below asset value versus a one-year average discount of 22.4%.

Vietnam Holding (VNH), at £80m the smallest of the three London-listed funds dedicated to the country, has performed in line with the benchmark over three months. It stands on the narrowest discount of 8.7%, reflecting its strong performance over five years with a total shareholder return of 115% compared to 44.2% for VEIL and 46.3% for VOF. Over that time the VN Index has returned 57.8% in dollar terms.