Is Vietnam Another China?

THE GIANT NEXT DOOR: COMPARING VIETNAM AND CHINA | RECENT INDEX PERFORMANCE IN VIETNAM | SOME QUANTITATIVE FEATURES OF VIETNAM’S EQUITY INDEX | VIETNAMESE PERFORMANCE: SHORT-TERM ISSUES | IN SUMMARY

Interest in Vietnam exploded in 2006 when the Ho Chi Minh stock index (Bloomberg: VNINDEX:IND) grew 144% in one year, forcing global and emerging-market investors to sit up and take notice. Those fortunate enough to catch the “sweet spot” of that growth—from January 31, 2006, to February 28, 2007—saw a 264% capital gain in just 13 months. Vietnam realized the highest gains of any emerging market in a year when emerging markets were one of the strongest asset classes around, prompting investors and emerging-markets strategists to wonder if Vietnam might be “the next China.”

Vietnam exhibits many characteristics of a new “Asian Tiger.” However, a comparison with China, a look at Vietnam’s evolving equity market, and contextualization of Vietnam’s near-term economic issues all point to a key constraint: Vietnam lacks China’s scale. Its capacity to absorb large-scale investments is very small in comparison to China’s, and its liquidity risk is greater. But for smaller investors, Vietnam offers diversification benefits that could balance out some of the political risk of Chinese investments.