The government is serious about tackling inflation. Investor confidence has returned. The IMF believes Vietnam is on the right track. Food inflation is set to fall drastically. Domestic manufacturing capacity increasing rapidly. Oil refinery set to come online in 2009.Let me explain this in a bit more detail…

Vietnam’s Ho Chi Minh City share index continues to be a leader this year. Once it led on the way up, this year it’s been leading global markets on the charge down. The index fell on every trading day in May and in early June as well. It’s now down by 60 per cent since the beginning of the year.

…Which begs a simple question: are we stark raving bonkers to still be in love with Vietnam?

The answer, of course, is no. This is still one of the most exiting opportunities out there. And there are clear signs that Vietnam’s market may now be at a turning point as the government takes strong steps to battle inflation even if it means sacrificing growth.

We’ve seen a sharp fall in most Asian share markets this year — China is down by 48%. So, Vietnam’s drop is actually part of a bigger market correction. But, added to that, investors have become skittish about Vietnam’s high inflation and the country’s growing trade deficit.

At the end of May, inflation in the country hit 25 per cent – the highest level since 1993. And then there is the trade deficit. It is expected to be above $15 billion for the first five months of this year. That’s a considerable increase on the 2007 deficit of $12 billion. But when you look beyond just the numbers, the story isn’t anywhere nearly as bad as it sounds. In fact, it points the way to Vietnam’s long-term growth.

After years of growth, these economies are facing questions over how to contain rising prices, exacerbated by the soaring value of oil and food.

We have already seen clear evidence that interest in the market is rising again. On June 10th — the day before the market hit its nadir — just $2.4 million of trades took place. On Tuesday, that had risen to $20 million.

Slamming the brakes on inflation…

The trigger for the change in mood was the State Bank of Vietnam’s decision to raise interest rates from 12 to 14 per cent last week. That was the second interest rate rise in just three weeks and makes them the highest in Asia. Investors were looking for a sign that the government was serious about tackling inflation and they got one.

Better yet, the government has indicated that it may raise rates even further in order to bring inflation down to single-digit figures by the end of next year. They’re clearly on the right track and the move has won them a pat on the back from the IMF.

In Vietnam, food accounts for almost 43 per cent of the consumer price index. And the rise in food prices has been a global phenomenon. The global rise in rice prices this year has had a huge impact on Asian countries. In the Philippines, armed soldiers were required to guard the countries rice supplies.

Even here in London, the Chinese restaurant across from our office has put a 30p “temporary surcharge” on all its rice dishes. I somehow doubt that it’s going to vanish now that the price of rice is coming back down…

But Vietnam’s finance minister, Vu Van Ninh, says that the country now has sufficient supplies to avoid further price increases, while still exporting 4.5m tonnes of rice this year. So we should see a sharp drop in food inflation in Vietnam this year.

Figures are like a bikini…

Figures are rather like a bikini. What they reveal is suggestive, but what they conceal is crucial…

Just look at the other great bugbear that has spooked international investors — Vietnam’s soaring trade deficit. It isn’t anywhere nearly as dire as it sounds either. Far from it…

Vietnam’s biggest import items are machinery and equipment (”M&E”), construction materials and refined fuel. These are all items that are vital to the development of an emerging economy. Most of them still have to be imported, but that’s changing fast. A lot of these capital goods are being used to build-up domestic manufacturing capacity — factories and infrastructure. It won’t be long before it is able to locally produce a lot of what it now imports. Take steel, for example. Vietnam is a net importer of steel today, but it will soon have sufficient production capacity to satisfy domestic consumption.

There’s a world of difference between a country that has a trade deficit because it is importing equipment and material to build factories, power plants and roads, like Vietnam is doing; and one that has a deficit because it is addicted to imported Sony Playstations, iPods and cheap sneakers.

Again, we’ve seen global markets reeling under the impact of surging energy prices. But what very few people realise is that Vietnam is actually self-sufficient in terms of crude oil production. What’s been missing is a domestic oil refinery. So the country has actually had to export 100 per cent of its crude oil and then re-import it as refined fuel. That’s been a major contributor to its trade deficit and it’s also been a major driver of inflation. But the country’s first oil refinery is going to come on-stream in 2009 — and that should have a massive impact on both inflation and trade deficit.

Vietnam’s government is obviously on a steep financial learning curve — remember that this is still a Communist country — but they’re learning fast. And, crucially, they’ve shown that they’ve got the will to act.

International investors have been stung by the fall-out from the credit crunch and the sharp fall in Asia’s markets this year. And that has left them a lot more risk-averse than they were at this time last year. But as a clearer picture of the outlook for Vietnam begins to emerge, I believe that we will see the country’s share markets rebound in the second half of the year.

I also believe that we will see this rebound happen rapidly, as sentiment regarding the Vietnamese market begins to turn in the coming months.

This is an excellent time to buy in to what – in my opinion – is the best profit opportunity this emerging economy has to offer.

Find out what this play is right now…

Regards,

Manraaj Singh
Editor
Profit Hunter

Source: Vietnam’s Coming Resurgence Explained: 6 Reasons Why You Should Get In Now