Global trade war poses risk to Vietnam

Vietnam has been developing rapidly over the last few decades, benefiting from global trade and significant foreign direct investment. The long-term growth outlook is currently uncertain, with the final level of US tariffs yet to be determined. VinaCapital anticipates that they will be set between 20% and 30%, well below the proposed 46%, which could provide a catalyst for a market re-rating. Meanwhile, 2025 GDP growth is likely to be driven by domestic drivers, after the export-fuelled 2024, with signs of domestic momentum seen in strong loan book growth in the banking sector and a notable pick-up in public infrastructure spending. The government recently maintained its 8% GDP growth target for 2025, while the IMF now expects 5.2% growth.

VOF: A private equity-like investor

VOF’s portfolio is well-positioned to benefit from Vietnam’s growth, as the majority of the portfolio is allocated to businesses exposed to domestic growth drivers. VOF’s investment approach – predominantly via privately negotiated deals – offers investors access to high-quality opportunities such as pre-IPO transactions and companies unavailable on Vietnam’s public market, such as healthcare providers, while also providing structured downside protection during the initial term of the investment. VOF shares are currently at a 21% discount to NAV, while at the same time Vietnamese equities remain under pressure from tariff-related uncertainty.

Vietnam is caught in the US-China crossfire

At the time of writing this report, the US has put a 90-day pause (expiring on 8 July) on the implementation of tariffs for all countries except China, which responded with retaliatory tariffs. The US has openly indicated unfavourable trade balances as an ignition point for introducing tariffs (Vietnam’s imports from the US amounted to just 9% of its exports to the US in 2024), and Trump stated that good trade deals may be a starting point to renegotiate the tariffs, which prompted a long list of countries to initiate talks with the US. Importantly, Vietnam’s government reacted before the announcement of tariffs, meeting with US officials to discuss boosting imports of agricultural products and liquefied gas from the US. In addition, the construction of Starlink ground stations (for Elon Musk’s satellite internet service) will begin in Vietnam in May or June, according to Reuters. At the same time, the Civil Aviation Authority of Vietnam proposed recognising Chinese aircraft certifications to help diversify its aviation sector, strengthen regional ties and strategically counterbalance global trade risks.

VinaCapital believes the final tariffs will be implemented at a level of around 20–30% which, while significantly lower than the initial proposal, would still have a significant impact on Vietnam’s economy. In its base-case scenario (20% tariffs), VinaCapital expects 10.5% earnings growth for 2025 for its stock coverage (the vast majority of stocks (by market cap) are listed on the Ho Chi Minh City Stock Exchange, HOSE), which compares to 16.6% expected before the announcement. We also highlight that the final level of tariffs in neighbouring countries will also have an impact on Vietnam’s competitive advantage for global companies setting up their manufacturing bases. Nevertheless, the manager still sees Vietnam’s valuation as attractive, as the market trades at c 10x forward earnings based on VinaCapital’s estimates, and 10.2x based on Datastream calculations, significantly below long-term averages (see Exhibit 2).

The tariffs present uncertainty in the long term...

The announcement of tariffs has cast a long shadow over Vietnam’s economic outlook, with the scope and magnitude of the measures still unclear. This has raised questions about Vietnam’s continued competitive edge over regional peers, particularly in export-driven sectors. Compounding the uncertainty is the potential need for Vietnam to reorient its trade relationships away from the US, a process likely to be gradual and with an uncertain end result.

...while the short-term growth drivers remain the same

In line with VinaCapital’s expectations, Vietnam’s economic growth in 2025 is shifting from export-led drivers to a focus on domestic demand. This is highlighted in early signs of strength in the banking sector, with system-wide credit growth reaching 3.9% in Q125, a sharp acceleration from just 0.3% in Q124, showing revival of domestic businesses and the real estate market. Financials remain the fund’s largest sector exposure at 21.4% of NAV, consisting primarily of holdings in Asia Commercial Bank (ACB, 12.3% as of end-March 2025), Vietnam Prosperity Bank (VPB, 3.9%) and VietinBank (CTG, 2.0%). The banking sector is set to continue its loan book growth, supported by improving consumer sentiment and increased infrastructure spending by the government, both key pillars of Vietnam’s evolving growth strategy. ACB expects its loan book to increase by 16–18% in 2025, whereas CTG expects 16% growth. The government is accelerating public investment spending: the budget for 2025 is 17% higher than in 2024; and disbursement in Q125 was 20% higher year-on-year.

The easing borrowing costs and favourable lending terms, alongside the government actively removing regulatory hurdles, have led to an acceleration in residential real estate as prop­erty ownership is becoming increasingly accessible to a broader segment of the population. The trend is visible in the largest residential developer in Vietnam, Vinhomes (VHM, 4.4% of VOF’s NAV), which has just rolled out two large-scale projects – Wonder City in Hanoi (133 ha) and Green City in Long An (197 ha) – and is seeing strong interest from potential homeowners. VHM targets 20% y-o-y growth in net profit in 2025. Real estate represented 20.6% of VOF’s NAV as at end-March 2025, being its second largest exposure, which positions VOF in line with domestic tailwinds.

VOF: A concentrated portfolio of high-conviction investments

VOF’s portfolio remains relatively concentrated, reflecting the manager’s long-term, conviction-driven approach. The manager does not engage in frequent portfolio rotation and takes account of the fact that Vietnam’s capital market is inherently illiquid for larger ticket sizes. As such, the fund follows a private equity-like investment philosophy.

Although nearly 80% of the portfolio is currently allocated to listed equities, only 23% of the investments were initiated through purchases on the stock exchange. VOF typically invests through private equity transactions, privatisations, pre-IPO deals and privately negotiated placements. These transactions often include structured instruments that secure a fixed capital return in downside scenarios, offering protection against weak operating performance or governance risks. Upon achieving pre-agreed milestones, these instruments generally convert into ordinary equity, which accounts for the current exposure to listed stocks.

As at end-March 2025, the portfolio consisted of just 25 positions (19 listed, six private), with the top 10 holdings accounting for 66% of portfolio value, underscoring the fund’s concentrated nature.

VOF’s strategy offers two key advantages to investors: first, it provides downside protection in adverse market conditions, as evidenced during the recent property sector downturn, where the fund successfully secured asset swaps when underlying investments defaulted (discussed in our August 2023 note); and second, it enables access to high-quality, unlisted opportunities that are not available on the public market. A notable example is VOF’s exposure to the healthcare sector, which remains underrepresented on HOSE, where listed players are predominantly manufacturers of healthcare products, whereas VOF is invested in healthcare service providers.

As at end-March 2025, VOF’s investments in healthcare made 8.8% of its NAV and consisted of two healthcare services chains: Tam Tri Hospital (5.1%) and Thu Cuc Hospital (3.8%), a unique investment opportunity in Vietnam. The healthcare sector is likely to benefit from increasing urbanisation and higher disposable income among Vietnam’s population. This is similar to VOF’s two largest sector exposures, financials (21.4%) and real estate (20.6%), as discussed earlier.

Performance

VOF delivered a 12.3% NAV TR per annum in sterling terms over the 10 years to end-March 2025, outperforming the broad Vietnam stock market, which showed 11.0% annual growth in the same period (VN Index). We partially attribute VOF’s outperformance to its positioning within HOSE’s largest and strongly performing sectors of real estate and banks. Over the short term, VOF has underperformed the index, which the manager attributes to profit taking in some of VOF’s largest holdings in February 2025, including FPT (8.7% of NAV at end-March 2025), which was affected by the wake of DeepSeek and the broad sell-off of the US tech sector, leading to an 8.5% drop in FPT’s valuation over the month. Nevertheless, FPT remains a strong driver of VOF’s results, increasing by 15% over the year ending March 2025 (in sterling TR terms). In addition, Airports Corporation of Vietnam (ACV) saw a decline of 12.6% in February due to initial concerns over losses in its aviation security business, which VinaCapital estimates will have a limited impact on ACV’s overall profitability.

VOF’s 4.7% NAV/share decline in March reflected the selling pressure on some of VOF’s largest holdings, due to the headline news of global uncertainties, amplified by US dollar weakness (the NAV/share decline in US dollar terms was 2.4%). Following the tariff announcements in early April, the sell-off accelerated, and currently (15 May) VOF’s NAV is 5% lower than end-March, while the VN Index is 4% lower. We note that VOF’s unquoted investments (19% of the portfolio at end-March) are valued periodically and do not reflect recent changes in investor sentiment.

Vietnam-focused funds have on average outperformed peers investing in other Asian markets (over the last five and 10 years), buoyed by the country’s robust economic expansion and structural tailwinds. In our opinion, the recent underperformance reflects the effects of uncertainty over global trade, on which Vietnam is heavily reliant, as well as (to a lesser extent) the remnants of the local credit crunch and the sell-off of real estate stocks in 2022. To end-March 2025, VOF is the second-best performing fund among the three Vietnam-focused funds listed on LSE, outperformed by Vietnam Enterprise in periods of one and 10 years, and by VietNam Holding over three and five years. VOF remains the only dividend payer, with a 2.6% dividend yield. VOF distributes dividends semi-annually (in April and November).