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More than 30 years after the fall of Saigon, the word “Vietnam” still evokes one of the most shameful chapters in recent American history.

Yet with the Market Vectors Vietnam ETF (VNM), a recent recommendation in my Bull Market Alert trading service, up 29.28% year to date, U.S. investors are now giving Vietnam a second look in 2013.

Much like giant China to the north, Communist Vietnam is a country of contradictions. Lenin’s statue still stands tall in (North) Vietnam’s Hanoi, while the high-rises sprouting from (South) Vietnam’s Ho Chi Minh City (formerly Saigon) skyline are emblazoned with American brand names such as Citibank and Sheraton.

Vietnam’s economy opened up when it signed a trade accord with United States in 2000, following a visit by then-President Clinton. Since then, the United States has now become Vietnam’s largest customer, accounting for 17% of the Asian nation’s exports. When the United States and Vietnam fight today, it is more likely to be about tariffs and market access rather than war crimes or missing soldiers.

Vietnam’s Remarkable Economic Transformation

Economic reforms introduced since the mid-1980s have turned this nation of 88 million — slightly larger than Germany — into an export champion. Since 1990, Vietnam’s exports have increased faster than China’s. Its average gross domestic product (GDP) growth was the second-highest growth in Asia over the past decade, climbing at an average of 7% per year until a few years ago. Vietnam joined the World Trade Organization (WTO) in 2006 and also has free-trade agreements in place with a number of its Asian neighbors.

Vietnam has been particularly successful in attracting high-profile, foreign direct investment (FDI). Vietnam was the second-largest FDI recipient in Southeast Asia in 2012 because of its attractive labor costs. Boasting a population whose average age is 28, Vietnam’s young, well-educated population ensures that it will have an ample supply of the right kind of workforce. A recent ASEAN Business Council survey ranked Vietnam as the second-most-attractive investment destination behind Indonesia, but ahead of Singapore, Thailand and Malaysia. Investment bank HSBC also recently identified Vietnam — alongside India and Indonesia — as most likely to benefit from the shift of FDI from China to Southeast and South Asia. No wonder “Apple killer” and South Korean giant Samsung has moved 40% of its mobile phone production to Vietnam.

For all of its impressive progress, Vietnam has its share of problems. Remember, like China, Vietnam is still a Communist country. It rivals India in its lack of infrastructure. It is ranked as the second-most corrupt country in Asia after Indonesia. Bad debts of state-owned enterprises, a bursting property bubble and a seemingly endless supply of corruption scandals have left the country’s financial sector in a mess.

The recent good news is that the country’s sullied reputation has spurred a government crackdown to win back investor confidence. Arrests of officials who doled out reckless loans to members of the ruling Communist Party now occur almost weekly. It is this willingness to face up to its problems that accounts for the recent remarkable shift in current stock market sentiment.

How to Make Money in Vietnam

Hanoi’s normalization of relations with the United States in the mid-1990s launched Vietnam’s first investment boom. Emerging market pioneers Franklin Templeton and others set up dedicated Vietnam funds after the initial euphoria. But Templeton quietly closed up shop within a few years after becoming disillusioned with Vietnamese graft and red tape. Sadly, longtime investors who stuck it out were not rewarded for their tenacity. One investor wound up his Vietnam Fund in 2004, 13 years after its launch, with early investors barely breaking even. The pioneer investors in Vietnam were, indeed, those who ended up with the arrows in their backs.

And even over the past two years, the Market Vectors Vietnam ETF (VNM) has substantially underperformed the U.S. S&P 500.

But that has changed over the last three months, as the Vietnamese stock market has taken off like a rocket, soaring 49.26% just over the past six months. It is also, by far, the top-performing stock market I follow on a daily basis for my clients at my firm Global Guru Capital.

Vietnam Market Vectors Fund versus the S&P 500 over Three months

And with VNM still only trading at a price-to-earnings (P/E) ratio of around 10, I expect that there still is lots of upside in this market.

So, buy the Market Vectors Vietnam (VNM) exchange-traded fund at market today and place your initial stop at $19.50.

But strap yourself in for a volatile ride.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below my Eagle Daily Investor commentary.

Sincerely,

Nicholas Vardy, CFA
Editor, The Global Guru

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