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[Editor's Note: This article was originally submitted on May 2. Since then, VNM has sold off considerably, down nearly 18% YTD as of 3 p.m. today (6/13/11). The author believes this makes VNM an even 'more attractive' long-term buy than when he first submitted this piece in early May. Only time will tell if he was right.]

Vietnam is a perfect example of a frontier market economy. It’s still a communist country, but is making steady progress in implementing a market-based economy.

“Frontier” markets are fast-growth markets that are too small and too under-developed to be grouped with markets like China, Brazil and India. These are places with huge growth potential – as well as high volatility – but remain under most investors’ radars.

Vietnam is one of the world’s cheapest markets right now, with a market price-to-earnings (P/E) ratio of about 10. That’s pretty cheap when you compare it with India at a P/E of 22 or another pre-emerging market like Peru which is on a P/E of 55.

Here’s why Vietnam is an interesting (albeit speculative) investment option:

  • Fast Growing Economy. HSBC forecasts Vietnam’s economy will grow by 7.1% in 2012. That’s 15% higher than the growth forecast for the rest of Asia (ex-Japan) – and more than double the stimulus driven growth expected in the U.S. for 2011.
  • Wealth of Resources. Vietnam is Asia’s third largest producer of oil. It’s also the 2nd largest producer of rice in the world, just behind Thailand. And it’s a major producer and exporter of coffee, tea and rubber – all commodities that are predicted to rise in price this year.

  • Strong Demographics. Vietnam is the 13th most populated country with over 86 million, just behind Japan and Mexico. So Vietnam has huge economic growth potential as more Vietnamese enter the rapidly expanding S.E. Asian middle class.

But Vietnam has drawbacks: Inflation is high, running at about 7%. Some analysts predict it may reach 10% in 2011. Part of the problem is the central banks poor monetary policy. Credit has grown too fast due to too-low interest rates. Some think Vietnam’s economy is in danger of overheating. There is also significant political risk and the Communist Government has allowed corruption to become endemic. However, political corruption is not limited to Vietnam. It’s evident across Asia and beyond. Witness how much money lobbyists throw at Washington.

How to play Vietnam as an investment: Investing in Vietnam had been difficult for the average investor until lately. Foreigners can now directly purchase stock in Vietnam, but it’s a hassle that’s not worth the effort for retail investors looking to put small amounts of money to work. One option worth considering is the Market Vectors Vietnam EFT (VNM), up 15% over the past 3 months, +6% YTD.

Chart Prophet Capital’s Yoni Jacobs has an interesting rationale for a long position in the VNM. If China suffers, he contends Vietnam will suffer less because of less headline risk and less panic selling. If China does well, Vietnam will likely benefit from increased investor interest in other Asian countries. He also believes the technicals and charts look much better for Vietnam than China.

Bottom Line: Vietnam is still a speculative investment, given its volatility. However, Vietnam will continue to go from strength to strength over the next five years. A modest investment could reap strong returns. Keep Vietnam on your radar.

Disclosure: I am long VNM.

Source: The Perfect Frontier Market? A Look at the Market Vector Vietnam ETF