Vietnam is not like most investment destinations these days?


On the upside, Vietnam has escaped both the growth slowdown and the political upheaval that have bedeviled many other emerging markets.

Gross-domestic-product expansion held steady at 7% last year, driven by dynamics internal—a million Vietnamese a year are moving from villages to cities—and external: multinational manufacturers relocating from a besieged China. The nation of 97 million is young (median age 31), well educated (15-year-olds finished fourth in a recent global science exam), and works for about a third of China’s wages.

The downside is that 45 years of Communist control have left a maze of investment barriers and restrictions that other markets ditched decades ago. Most listed companies have a legal limit of 25% foreign ownership. Non-Vietnamese can’t trade directly on the Ho Chi Minh City Stock Exchange, so they have to pay fat commissions to local brokers. “The listed price is not the transaction price,” says Matthew Vogel, chief strategist at emerging markets manager FIM Partners. “You have to book a 15% to 20% profit to be in the money.”

That has led to limited liquidity—a maximum of 20 companies are tradable, says Jinjoo Hong, head of Asia equities sales at broker Auerbach Grayson—and to dizzying valuations for a few relative large-caps, like Vingroup (ticker: VIC.Vietnam) and Vietnam Dairy Products (VNM.Vietnam). The trading obstacles have also kept Vietnam classified as a frontier, rather than emerging, market by the index gatekeepers at MSCI. That distinction bars many international funds from investing at all.

These negatives have weighed over the past six months: Vietnamese stocks are down more than 2%, while global emerging markets advanced more than 5%. But the cooling market leaves attractive entry points for second-tier companies that the herds may have overlooked, says Leigh Innes, an emerging markets portfolio specialist at T. Rowe Price. Vietnam is T. Rowe’s second favorite frontier country after Kuwait, with a 24% weighting in global portfolios, she says. Top stock picks are geared to consumer spending, like electronics retailer Mobile World Investment (MWG.Vietnam) and bling chain Phu Nhuan Jewelry (PNJ.Vietnam). T. Rowe also likes software developer FPT (FPT.Vietnam) as a play on Vietnam’s burgeoning brainpower.

Auerbach Grayson’s Hong is another fan of both Mobile World and FPT. She adds steel maker Hoa Phat Group (HPG.Vietnam) as a way to cash in on rampant construction. Laying hold of these promising shares isn’t easy, though. Mobile World’s market cap is about $2.2 billion, and FPT’s about half that. Divide by four for the foreign investor quota, and basically you can purchase only when another foreigner wants to sell. “We buy our top picks whenever there is room available,” Hong says.

Hanoi authorities have a long-term commitment to sell state shares and ease foreign investment caps, raising total equity capitalization from its current 80% of GDP to 100%. That would point them toward emerging market status, which could raise valuations by a quarter, Hong estimates. Not much is likely to happen before 2021, when a new government takes over. Even then, Vietnam’s rulers may be disinclined to mess with economic success, Vogel says. “I find my trips to Vietnam really amazing, but structural reform in the capital markets is needed to broaden the investment opportunities we all want,” he says.

Investors with stamina have options for buying into this country on a roll, but they had better be prepared for a long haul.

By Craig Mellow @ Barrons

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