In February 2007, I visited Ho Chin Minh City, formerly Saigon, as part of an inter-Asian investment tour with my Sovereign Society publishers.

I was totally impressed with this bustling city, dominated by strong work ethics, a young population and bulging GDP growth rates of 7.5% a year since 2000.

But even before I got to Vietnam, I was a little wary of Vietnamese stocks. And after meeting with the director of the stock exchange, I decided to avoid this high-flying market. Stocks in Ho Chi Minh City had already surged more than 300% off their lows a few years earlier. Everyone was piling into the market, overloading the exchange’s trading ability.

At the time, Vietnam had just joined the World Trade Organization and euphoria was everywhere. The exchange’s director was eager to encourage more foreign inflows, naturally talking up Vietnam and its potential. I felt differently, at least about the stock-market.

“Sssssssss” – That’s the Sound of This Bubble Popping
Twelve months later, Vietnamese stocks, as measured by the benchmark VN Index, have crashed 49%. In fact, these stocks have collapsed 18% over the last seven trading sessions alone. On Thursday, the market finally mustered a dead-cat bounce, rising 5%.Though I have no doubt Vietnam will become a long-term success story, like China over the next decade, the boom-and-bust cycle in stocks remains alive and kicking in the emerging markets.We’ve all been spoiled by huge emerging market gains since the lows in 2002. In reality, boom and bust cycles continue as markets go from periods of extreme disrepute to excessive optimism and ultimately result in a crash.

The way to make big money in these markets is to buy them at the point of maximum pessimism, not at all-time highs. I’ve never purchased an emerging market after a huge rise. I prefer to buy after a crash and just sit tight.

Vietnam is battling a torrid 12% inflation rate and cutting liquidity. Usually when an extreme credit tightening follows a big boom, it leads to a crash. That’s similar to what happened in 1987 and even 1929.

Vietnam simply printed too much of their local currency, the dong, to absorb a rapid influx of foreign capital. Like all central banks, the Vietnamese went overboard. Now they’ve been busy reducing liquidity over the last several months and draining stock-market flows.

Over the next several months, perhaps sooner, the VN Index will form a bottom. That will mark another great buying opportunity for investors to enter Vietnam. After all, this market is one of the most compelling Asian tigers since Thailand and Taiwan over 30 years ago and China only three years ago.

In London, a few Vietnamese-dedicated funds now trade near their 52-week lows and offer good value. Right now, I’m researching several to find the best values. Look for me to recommend one of these special London-based funds in an upcoming issue of The Sovereign Individual. Stay tuned.

ERIC ROSEMAN, Investment Director

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