What I Learned From Sir John Templeton
When recently asked about Vietnam by a reporter from the nation's leading investment daily, I knew its stock market must have some mojo.
Why? Nobody ever asks me about a country's stock market unless it's on a hot streak.
Sure enough, during the month of December 2012, Vietnam's market was up 9.6%. And over the last month, the Market Vectors Vietnam ETF (NYSE: VNM) is up over 20%.
Vietnam is a volatile market where you can make - and lose - a lot of money in a short time.
In a moment, I'm going to offer you a simple approach that I learned from the legendary global investor, Sir John Templeton. It'll maximize your upside potential and limit downside risk.
First, let's take a quick look at Vietnam's fundamentals.
Not a Democracy By a Long Shot
Vietnam's political system can be described as a command-and-control authoritarian state. It's a one-party system. The Communist Party of Vietnam has control over the executive branch and exercises its power through the 150-member Central Committee.
Stock Market Highly Concentrated
Financials (largely state-owned banks) account for roughly 50% of its market. Strict rules limit foreign ownership of stocks to 49%. And foreign investors can own only 30% of the financials. There are 827 stocks in the exchange, yet liquidity in the bottom 600 of this list is minimal.
Banking, Currency, Corruption and Inflation Are Key Risks
Vietnam's economy suffers from reoccurring bouts of hyperinflation, and a weak and volatile currency, the Dong. Recently, the official inflation rate was brought down to 5% and interest rates were cut.
The banking system isn't very transparent… A lot of crony loans go to firms with political ties and are used to speculate in real estate projects. The banks are undercapitalized and the percentage of non-performing loans is anybody's guess, though the government estimates it at 10% of the total.
Like all governments that pick winners and losers, corruption is a big problem.
The Main Attractions: The People & Underground Market Economy
Vietnam's entrepreneurial and youthful population of 90 million and counting is the key reason to invest in Vietnam.
The country offers good value as it evolves into one of Asia's lowest-cost manufacturing hubs, with wages less than a third those of China's. With a 97% literacy rate and ample natural resources, Vietnam has a vibrant underground market economy that produces most of its economic growth.
In short, Vietnam offers investors huge potential, if its government only gets out of the way.
A Smarter Strategy for Frontier Markets
Given Vietnam's high profile, and the fact that many of the concerns I already listed will be with us for a long time, the volatility of VNM is inevitable.
Turn it to your advantage by buying markets like Vietnam when they are down and out, not when they are surging. As Templeton put it to me: To score big gains with low risk in emerging markets, invest only when things look "absolutely miserable."
As you can see from the chart below, Vietnam has surged since early December. This momentum may carry on for a while since 50% spikes are not uncommon. But if you jump on board now, a trailing stop loss is a must.
A smarter strategy is to wait until absolutely no one is talking about markets like Vietnam, and then build a position and wait for the inevitable turn.