7. Vietnam’s middle-class rising, is it really? / Investing as a new survival skill

Among the investment and business community, the most common thesis on Vietnam, a tale as old as time, is its rapidly expanding middle-class. This narrative appears in everyday pitch materials, investment proposals, brokers’ recommendations and media. It is repeated over and over, and for long enough that most people now just take it as-is and automatically adopt it for all investment decisions. After all, it is such an easy sell. A growing country with expanding middle class is a rising tide that would lift all boats – investors can hardly lose money on any investment.

But is it really the case?

A common trait of most societies, regardless of their political system, is that there are usually different income classes – broadly speaking, the “one-percenter”, the middle, and the lower-income segments. These segments divide a country’s overall pie of wealth among themselves. When one says that the middle class is expanding, in relative terms, that would mean that either the “one-percenter” or the lower-income segment, or both, would have to shrink…

Let’s admit it. There is absolutely no way the “one-percenter” would shrink over time – well, because “the rich only gets richer”, it is true thousands years ago and it is true nowadays, anywhere. The question, then, becomes “Is the lower-income segment contracting over time as a country grows richer”? The answer is Yes. As a country grows wealthier, there should be less and less population under poverty. This segment, however, always hold very little wealth in a country’s overall pie of wealth anyway, so even if it shrinks, is it enough to expand the middle-class segment in a meaningful way? Especially when the magnitude at which the “one-percenter” expands their wealth would be several times faster and larger than the contraction of the lower-income segment. The “one-percenter” would then continue to put their ever-expanding wealth into assets, inflating asset prices over time and making them become unattainable to the masses.

To me, the statement that the middle-class is expanding in Vietnam is seriously flawed in two ways. First, it overlooks such relative dynamic between the different segments as mentioned above. Second, it confuses between income money (measured in absolute dollar amount) and true wealth (measured by asset value).

It is obvious that the dollar income level (measured by GDP or GDP per capita in, say, USD) has risen in Vietnam over the past two decades. An ordinary “middle-income” Vietnamese consumer generally has felt richer – they have now been able to afford things they were not able to 10 years ago – like a daily $5 Starbucks coffee kind of affordability. But are they really “wealthier”? A rising dollar income level would generally mean more wealth… only if there was no change in cost of living or no such thing as inflation.

The common issue with developing countries such as Vietnam is that yes, income does grow fast, but cost of living grows even faster for most people. (I do not intend to disregard the public statistics of 6-7% GDP growth, higher than the 4-4.5% inflation , but perhaps that does not apply to most people?! ) In such an inflationary environment, true wealth deviates enormously from money. As such, to measure one’s wealth, asset value would be a better measurement than their cash income.

Let’s look at this chart below:

Source: Vnexpress / Numbeo

Property is probably the most common asset class in Vietnam, it is also the most basic human need. This chart shows the average housing price compared to average household income. This means it takes an average household in Vietnam ~24 years, without spending anything from their annual income (not for food, clothes, schooling, literally anything) to buy an average home. If they can only save 50% of their income, it would take them ~48 years. And that is assuming that home prices do not increase any further in the future. It is even worse than many developed countries with notoriously high property prices such as Canada, Singapore or South Korea.

Of course, one could argue that it might also be because Vietnam’s housing prices have been in a huge bubble. But even now after the recent 2-3 years of economic struggle, new condo launches are still being priced at least 50-60% higher than pre-COVID, when domestic interest rates are even lower now than before. So I’m not sure when the bubble would burst or if it would ever be allowed to burst. And looking at history around the world, even when an economic bubble bursts, have you seen one where the ordinary people become better off?

Housing or shelter is among the most basic human needs and the cash paid towards housing is usually the biggest line item in everyone’s personal finances. When the ratio becomes high, it means one would have to save more, borrow more and spend more towards housing (regardless of whether they own or rent), effectively reducing their “discretionary” income that they could spend on anything after. Not only that, higher housing costs would then cascade into the economy, lifting all other costs up eventually.

I am pretty sure most of us have, at some point, wondered how is that that our income today, perhaps a hundred times higher than that of our parents 20-30 years ago, but they could afford a home and we can’t. So are we really wealthier now? And considering this fact, would you still say that the Vietnam’s middle-class is rising?

After all, if we segment society based on true wealth (and that is asset ownership), there are only two segments – one that owns assets and one that does not. Asset owners over time would benefit from inflation, and those that do not own assets would be worse off due to the erosion of their purchasing power (even when their monetary income level still rises in dollar amount). Gradually, one segment will rise up and the other will be pushed down. Wealth gap will accentuate over time, more towards the point of extremes and anything in the “middle” would vanish. It is an issue in most countries, why should it be different here?

So, to say that Vietnam’s middle-class is rising, is that rather too simplistic and short-term of a view? Perhaps, one should look beyond the optimism sparked by this narrative and consider the not-so-optimistic flip side of it too.

Investing – a new survival skill

This is a topic I think hard about and hold near and dear to my heart. To me, in such an inflationary world we’re living in today, knowing where to put your hard-earned income money (or know how to invest) is no longer just a mean to get rich, it has now become a survival skill that one must have. The common issue in most countries today is the fact that young people even with a decent-paying job would still not able to afford a home, which is a basic human need.

I often regret not thinking about this and thus did not start my compounding journey much sooner. That said, below are some of the things I am currently doing as part of my personal finance and investments, which I would teach my “future” kids as well:

• Invest in yourself (education) to first multiply your income level, but still do not be overconfident on how much your employment income could grow – after all it is paid by someone else and is not within your control
• You can sell your business but not your job
• Strive to own assets – financial assets like equities if you understand them or real assets (limited in supply but has everyone desire for it, such as property or Bitcoin – yes I own BTC as a big part of my portfolio)
• Do not own “expenses” early in life – just because something is expensive such as cars doesn’t make it an asset
• If you have to take out credit / a loan, make sure it goes towards assets and not expenses
• In making business bets, do not bet on the middle-class. It is shrinking. Bet on the rich instead
• Sell things or invest in things that sell to the rich or that are essential to everyone’s daily life and/or are truly differentiated – i.e. things that can pass on inflation to the consumers through raising prices without seeing demand decline

This is my first time taking a stab at a difficult and sensitive topic. My view is not a popular one as it has a negative connotation. People cheer positivity and dislike negativity. Still, I welcome all viewpoints and stand to be corrected.

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