The frontier market that has outperformed the world so far in 2021

Thanks to strong economic growth and a flood of domestic retail investors, this market has boomed. 

It has mostly been a good year for stocks markets so far. The S&P 500 has surged ahead, providing investors with a total return of over 15%, in sterling terms (as all subsequent returns cited will be).

Meanwhile, the FTSE 100 has finally seen some recovery, with investors enjoying a return of almost 12%. The MSCI All-Country Would Index saw a similar return, at 11.7%.

But all these returns have been blown out of the water by the performance of one small developing economy - Vietnam. Measured since the start of the year, the Xtrackers FTSE Vietnam Swap ETF 1C (LSE:XVTD) has provided investors with a total return of 20.6%.

Indeed, Vietnam’s stock market has been one of the best performing in the world so far this year. As the ETF performance above suggests, the FTSE Vietnam Index has returned over 20%. Meanwhile, the local VN-index rose by nearly 10% rise in the first quarter of the year, followed by a further 18.5% gain in the second quarter. Measured over the two first quarters, it is up by 23%.

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There are two related explanations for why Vietnamese shares have done so well this year: its strong economic performance and an influx of local retail investor money.

On the first explanation, Vietnam has been a beneficiary of the global economic recovery and rising global demand. For example, exports to the US in the first half of the year grew by 42.6%. On top of that, favourable weather conditions have been a boon to its agricultural sector.

As a result, the country’s economy grew by 5.6% in the first six months of 2021. That was below the government’s forecast of 5.8% due to new virus outbreaks, which forced some key electronics manufacturing hubs to temporarily close. Nevertheless, Vietnam has stood out in the world as a success story for containing the virus.

Currently, the government expects GDP to grow between 6% and 6.5% over the whole of 2021. To achieve this, the country will need to grow by 6.3% over the next half of the year. 

With the economy expanding, Vietnam company earnings should grow, which in turn boosts share prices.

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The other explanation is an influx of domestic retail investor money. Vietnamese citizens are increasingly putting their money into the local stock market, betting on the strong recovery of their economy. There are reports of a surge in new retail trading accounts in the country. Vietnam previously experienced a stock market boom in 2007, however, this was driven by a wave of foreign investment, which soon reversed course.

Vietnam was able to beat its frontier market peers. Measured since the start of the year, the Xtrackers S&P Select Frontier Swap ETF (LSE:XSFD) has returned just over 10%. While not bad, it is behind both the performance of the MSCI ACWI and Vietnam’s market. Vietnam currently accounts for around 30% of the frontier market index.

Vietnam has also far outpaced its South-east Asian neighbours. For example, the HSBC MSCI Malaysia ETF GBP (LSE:HMYR) provided a return of -9.6%. Meanwhile, the HSBC MSCI Indonesia ETF (LSE:HIDD) lost 13.5%.

Active managers focused on Vietnam have experienced mixed fortunes. The popular VinaCapital Vietnam Opp Fund Ord (LSE:VOF), run by Andy Ho, returned 14.4%. Not bad, but below the index. Meanwhile, Vietnam Enterprise Ord (LSE:VEIL) has managed to produce a return of over 30%, beating both the FTSE Vietnam and the local VN index.

Several other individual market ETFs provided similar performance to Vietnam in the first half of the year. For example, the Invesco MSCI Saudi Arabia ETF (LSE:MSAU) returned 26.4%. Meanwhile, the HSBC MSCI Russia Capped ETF (LSE:HRUD) returned 18.2%. But it is important to note that these countries were able to provide such strong performance thanks to the global recovery and rally in oil prices.