Shifting Supply Chains
The idea:
We like prospects for economic growth in Vietnam and the Philippines. We continue to see supply chains shift to Vietnam, and it will become a strategic manufacturing hub for everything from apparel to electronics, durables and increasingly automotive and electric vehicle value chains. It’s relatively large labor force is very well-educated and highly skilled but still low cost. It’s next to a lot of port infrastructure, and the government’s supportive of developing businesses and the environment for foreign direct investment.
In the Philippines, growth is being powered by an increasing number of companies moving call centers there. It has some interesting competitive advantages. For instance, most of its large and educated workforce speak English with minimal accents, so companies are comfortable using it as a main call center backbone. That’s a key driver of services growth, and infrastructure investment has helped unlock productivity growth.
The strategy:
In Vietnam, we like FPT, an information technology services company taking market share from Indian IT services in particular, given its highly skilled, lower-cost labor. FPT operates an IT services university with campuses around the country, developing the next generation of professionals, so it’s vertically integrated with labor being its key asset.
We also like electronics retailer Mobile World and Vincom Retail, which owns and develops shopping malls. Vincom benefits from a growing middle class, and its malls are innovative growth businesses with churches, doctors, theaters, and concerts — helping malls become the center of community life.
In the Philippines, we like Ayala Land, a leading property developer and real estate operator. It’s well-positioned given its extensive land bank in locations poised to be unlocked by infrastructure buildout. And a growing middle class will drive demand for its housing products — it does residential development as well as hotels and malls.
There are points of debate about the growth stories in Vietnam and the Philippines. In Vietnam, weakness in the real estate sector has driven a liquidity crunch. Whether that persists and spreads is a debate, but we don’t think it will. The Philippines has current account and fiscal deficits and there are concerns over rising inflation. However, we think higher tourism activity and retrenchment in commodity prices like oil will help the current account deficit, and that inflation has peaked.