As emerging markets remain the current hot topic, Michael Wilson investigates whether Vietnam is worth looking at, or whether it is simply a bubble waiting to burst.

It’s a country whose name still haunts a whole generation of Americans. A one-party communist state in which domestic dissent is sometimes crushed without much fanfare or public condemnation. A country where the average per capita income is no more than $1,000 a year. And a place where the stock market is still a primitive place, to put it mildly. Not a good starting point, you might think, for an exploration of an exciting new emerging market.

But you might be wrong. Vietnam is a country on the move these days, especially now that China has started to get more expensive as a rival manufacturing base for foreign companies. Vietnam’s economic growth over the past ten years has averaged an impressive 7.5 per cent, even after you’ve allowed for a steep decline in the early months of this year as the global recession threatened to kick in. Indeed, during the last six months or so its industrial performance has bounced back very sharply, thanks to a series of government incentives and stimulus packages that have put a vast amount of spending power into people’s pockets. Even in this difficult year, Vietnam should manage 5 per cent growth.

And there’s more. The latest survey of global investment destinations from the United Nations Conference on Trade and Development (UNCTAD) puts Vietnam’s attractiveness right up there in the top division for 2009-2011, alongside Brazil, China and India. So perhaps it’s not so very surprising that foreign fund managers are suddenly starting to take a serious interest in the country. Nor that Vietnam-based funds have already doubled their investors’ money this year.

That’s great, of course, but the question we also need to ask as investors is whether this remarkable boom can go on, or whether the easy money has already been had. Indeed, are we looking at an asset bubble that might be ready to burst? That’s a tough one, but we’ll start with the good news.

Vietnam’s communist government is moving fast these days to rebuild its links with the developed world – not least because it is fully aware that China is getting less competitive as a rival investment base.

Join the club
Two years ago it joined the World Trade Organisation, after some intensive lobbying from the United States. And next year it takes over the responsibility of chairing the trade body ASEAN, which groups Singapore, the Philippines, Thailand, Indonesia, Myanmar, Brunei and Malaysia with the Indochinese states of Laos, Cambodia and Vietnam. All this has heightened the pressure on the government to make itself more open to foreign investment, and generally to be more outward-looking.

Not before time, some people would say. It can be surprisingly tricky to get a proper investment toehold in Vietnam’s business environment. Companies tend to be small, which makes them too risky for many fund managers to contemplate. The stock market is small, slow, inefficient and poorly regulated. And there are many business sectors that are largely closed to foreigners – telecommunications, transport and some retail industries, for instance. Not to mention the fact that many business sectors are crushingly dominated by state corporations, which get all the sweet deals and leave everyone else at a disadvantage.

Right of veto
Then there are the laws that prevent foreigners from owning more than a 30 per cent stake, whereas the government itself will typically hold a 40 to 51 per cent stake, which effectively gives it the right of veto over any foreign investors’ interests. That’s enough to persuade many Western fund managers that they simply cannot safely invest their clients’ money in the new tiger economy.

Fortunately, though, Vietnam’s government is fully aware of the problem. More to the point, it needs a bit of help right now with balancing its books, and it’s going to need that foreign money rather urgently. As recently as September, the Ministry of Finance was saying that the country still needed another US$150 billion of investment between now and the end of 2010, and that at least 30 per cent of this ought to come from outside investors. It’s going to take a lot of regulatory change to rustle up that missing $45 billion, and they’re working on it.

There’s a consultative team working on upgrading the stock market. Restrictions on foreign ownership are being reviewed and in many cases relaxed. Already the authorities are talking to the state-owned Chinese mining group Chinalco about developing a bauxite mine – something of a policy departure, since Vietnamese mining interests have always been fiercely protected.

Indeed, another potential mine is being discussed with America’s Alcoa. The eventual plan is to attract $15 billion of foreign mining investment between now and 2025, although, admittedly, that’s a long way off.

First, however, the government has to deal with a more pressing problem. This year’s  100 trillion dong (US$6 billion) stimulus package has put some oomph into the consumer economy, but the inflationary risks are now getting out of hand. Vietnam’s domestic credit volume grew by 17 per cent just during the first half of 2009, and even the official projections for the whole year were still running at 25 per cent – 27 per cent by the mid-autumn. That’s scary, because more consumer borrowing nearly always means higher shop prices. But nobody really knows what the actual inflation levels are, because Vietnam’s official inflation figure of 10 per cent is widely regarded as a work of fiction and it may be much higher. The thing everyone is agreed on is that if the price rises get much worse they’ll soon start to affect the value of the currency, which won’t be good for anybody.

In short, Vietnam needs to slow down a little if it is to carry on growing successfully in the medium term. Either that, or else it will have to open up its investment scene to fund the gaping hole in its government accounts. By investing in Vietnam you’re effectively assuming that one of these things will happen.

Getting invested
So how do you go about it? Well, for most Britons the obvious route would be through a specialist investment fund like the VinaCapital Vietnam Opportunity Fund, a Vietnamese-registered fund that you can also buy on the London Stock Exchange under the EPIC code VOF.

There are other, more diversified, ways of getting into Vietnam. Deutsche Bank runs an exchange-traded fund called the FTSE Vietnam Index ETF, which tracks the performance of about 20 large Vietnamese companies that have sufficient foreign ownership to be viable for a UK investor. It takes a little tracking down, but it’s worth the trouble because you can buy it in sterling and put it into your ISA.

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