Why Vietnam is the new Asian tiger

You'd have to have been living in a hole in the ground, probably on the Moon somewhere, not to have realised by now that China is set to be a very big growth story in the years ahead.

But you may not have heard quite as much about what investment bank Citigroup calls 'the new powerhouse of south-east Asia' - Vietnam.

Why Vietnam is booming

The country is one of the fastest-growing in the region. GDP growth came in at 8.4% last year, and is set to be 7.8% this year, according to the International Monetary Fund - that's comparable to India.

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Poverty rates in the country have been sharply reduced since 1991 - the percentage of Vietnamese people living below the global poverty benchmark of $1 a day has dived from 51% to 8%. And Vietnam has recently become the 150th member of the World Trade Organisation after a long and sometimes fraught discussion process.

Growing foreign investment and regulatory reform has seen the Vietnamese stock market explode since it was created in July 2000. Then it had just two listed companies with a total market capitalisation of $16.8 million (£8.6 million). Now there are around 50 listed stocks, with a market cap of $3.1 billion (£1.6 billion). That's still tiny compared to others in the region - but the government plans to expand it even more rapidly in the coming years.

Vietnam: Domestic investment set for take-off

This will be fuelled to a great extent by opening the market up further to foreign investment. But another important factor to bear in mind is the huge potential for domestic investors to start using stocks as a way to plan for their retirement.

Currently, only about a quarter of a percent of the population invests in stocks. But annual savings amount to 30% of GDP. That means there's a lot of money just waiting to be invested when equity investment becomes more accessible to domestic investors.

And with companies like Intel and Nike committing more and more resources to the country, the population is likely to keep getting wealthier - particularly as the government is introducing a raft of tax cuts at the start of next year.

Deregulation, political and religious stability, and a growing middle class all add up to a very attractive investment story.

How to invest in Vietnam

So how do you get on board? Well, it's still not easy for private investors to invest in Vietnam directly, but luckily enough, you don't have to - there are several London-listed funds that can give you the exposure you need.

Aim-listed Vietnam Holdings (VNH) focuses on the privatisation of state-owned companies, while Vietnamese investment bank VinaCapital manages the Vietnam Opportunity Fund (VOF), which focuses on plays on domestic consumer spending growth; and VinaLand (VNL), a Vietnamese real estate fund.

All three have performed well in line with the stock market. And in terms of risks, it's important to remember that if the US slows down or goes into recession next year (as seems increasingly possible), Vietnam is likely to suffer along with most other emerging markets - the country exports nearly nine times as many goods to the US as it buys, so the weakening dollar is not good news for its export sector.

But in the long term, and certainly if the country continues to reform its stock market, Vietnam looks like a good bet. As Merrill Lynch regional strategist Spencer White puts it, Vietnam is a '10-year buy'.

First published on MSN Money 11/12/2006