Resilient Vietnamese tiger cub starting to grow up

Serious Money: The economic tigers of China and India have received considerable press and investor attention in recent times.

Indeed, both countries have featured in this column, as have Brazil and Russia. Less attention is given to the economic cubs that could soon become tigers. Vietnam, which only last month became the 150th member of the World Trade Organisation (WTO), is one such country.

The Vietnamese people are certainly resilient. They defeated the French in 1954 and less than two decades later did the same to America, who failed to win their "hearts and minds" and suffered more than 57,000 fatalities in an ill-advised war. Its economy has proved equally resilient, surviving the collapse of the Soviet Union, its major sponsor, in the early 1990s, the Asian financial crisis of the late 1990s and, more recently, the Sars virus and bird flu.

Its accession to the WTO suggests that the communist bastion has arrived on the world stage.

Vietnam adopted the "doi moi" programme in 1986, which heralded the country's move away from Soviet-style central planning towards a socialist-oriented market economy. Economic growth averaged 9 per cent through the mid-1990s and, although the Asian financial crisis temporarily slowed progress, growth from the turn of the millennium to the end of 2005 averaged almost 7.5 per cent a year - better than any Asian economy apart from China.

The country's economic success has seen the percentage of the population living in abject poverty drop from 51 per cent 15 years ago to below 8 per cent today. Not even China can match such a feat.

Vietnam is expected to enjoy economic growth of 8 per cent both this year and in 2007. Indeed, the country's growth potential in the years ahead is nothing short of staggering. Based on its demographic profile, increased industrialisation and rising foreign direct investment, the country could push economic growth rates above 10 per cent.

Vietnam enjoys an extremely favourable demographic profile - more than half its population is aged 25 years or younger, while almost 60 per cent is below 30. In other words, the majority of the Vietnamese people were born after military conflict ended.

Population growth and rising participation rates mean that Vietnam's labour force should continue to grow by more than 2 per cent per annum for the foreseeable future.

The country's young population, high literacy rates and low wages combine to make Vietnam an attractive destination for foreign investment. Intel announced plans to build a test-and-assembly plant north of Ho Chi Minh City earlier this year - the largest of its kind in the world. Canon is constructing the largest inkjet printer factory in the world further north. Nike has announced plans to increase production that will make Vietnam the world's second-largest source of Nike footwear. Not surprisingly, foreign direct investment so far this year is already well above the total for 2005.

The Vietnamese stock market, formally known as the Securities Trading Centre (STC), located in Ho Chi Minh City, is no longer a laughing stock. When it was launched on July 28th, 2000, just two individual stocks with a total market capitalisation of less than $28 million were traded. The market's capitalisation has grown eightfold to more than $4 billion (€3 billion) in the last year as the number of partial privatisations has soared.

The number of quoted stocks is still fewer than 60 and the five largest companies account for more than 60 per cent of total capitalisation. Nevertheless, the market is developing nicely.

Stock prices have more than doubled in the year to date - or by more than 75 per cent in euro terms - outpacing the performance of both China and India. However, the market's relative illiquidity means that it has been a white-knuckle ride. Stocks doubled by May, only to drop by 30 per cent during mid-year turbulence.

The market has since recovered and the gains since WTO accession have been phenomenal.

High market volatility means that this is not an investment option for "widows and orphans". Furthermore, recent gains have seen price/earnings multiples soar to more than 20 times. High returns on equity partially justify these high valuations, although it is more than likely that the market is overbought.

Investors with a long-term view could be amply rewarded here, as fortune favours the brave.

Charlie Fell is an independent consultant and lectures in finance and investment at UCD and the Institute of Bankers in Ireland