VOF: Trans-Pacific Partnership negotiations complete
Short term impact
The short term impact will likely be twofold. Firstly, the agreement will undoubtedly have a positive influence on investor sentiment towards Vietnam. Early signs are promising for equities; over the last two days, the VN Index rose 3%. Foreign investors have taken this cue to buy into Vietnam, with companies in the export-oriented sectors, such as fisheries, garments, logistics and industrial parks, representing over 4% of the VN Index weight, see positive price action. Furthermore, as foreign funds increase their allocations to Vietnam, we expect to see more money flow to heavily weighted industries with available room for foreign investors such as banks (32% index weight) and insurance and brokerage firms (5% index weight) being some clear beneficiaries.
Secondly, a number of Vietnamese companies will benefit directly from the 18,000 tariff cuts/reductions on goods included within the TPP's provisions. Given Vietnam has been rapidly taking market share in global trade, in contrast to a widespread contraction of Asian exports, these tariff cuts will only help further accelerate Vietnamese exports. This point is of particular importance when considering the relationship between the U.S. and Vietnam, as the U.S. accounts for over 20% of Vietnam's total exports.
Longer term impact
The medium to long term impact of the TPP, as many studies have concluded, will accelerate Vietnam's GDP growth by 1-2% p.a., helping to increase Vietnam's exports by over 28% by 2025, and providing widespread benefit to domestic firms both private and listed. Moreover, strengthened exports as a result of the agreement will positively influence the trade balance and help maintain a stable Vietnam Dong which has been under pressure as of late following China's much-publicized currency devaluation. In addition, Vietnam's reliance on Chinese trade will lessen as exports to other countries grow. It is important to note that China was prominently left out of the agreement, carrying potential geopolitical implications moving forward.
For manufacturers, TPP membership will make Vietnam an even more attractive manufacturing hub for international companies and reinforce FDI inflows. This will in turn lead to a more favourable exchange rate between the USD and VND.
The timeline for the ratification of the agreement may still be subject to a few obstacles. While Vietnam will surely ratify quickly, countries like the U.S. face internal debate that could lead to a drawn out process. Regarding the U.S., it is unlikely that the Republican-controlled Congress will block ratification as President Obama has already been granted authority to "fast-track" the deal through the legislature and Republican Party ideology appears to align with increased trade liberalisation.
The TPP joins a long list of trade agreements between Vietnam and a host of nations including recently finalized free trade agreements with Korea, the European Union and Russia-Belarus, placing Vietnam among the most open economies in Asia. In fact, recent data shows that the openness ratio (defined as the sum of export and import to GDP) for Vietnam has reached 160%, the highest among ASEAN nations. The further opening up of the Vietnamese economy ushered in by the TPP will be joined by increased pressure on domestic firms to compete with cheaper imports, and an overall requirement to improve governance and labour conditions, another positive influence brought on by the agreement.
Impact on VOF
VOF has positions in Vinatex (1.1% of NAV), Vietnam's largest textile and garment manufacturer, and Danang Rubber Company (1.6%), a leading domestic tyre manufacturer which will benefit directly from the short term impacts of the TPP through the potential reduction of tariffs and increasing competitiveness of its exports. Coupled with the Government's recent announcement to progressively lift foreign room limits on stocks, there could be sufficient momentum to lead to an overall market re-rating.
More information on the Company is available at http://vof-fund.com/