Vietnam is an overlooked opportunity in Asia

By Peter Kohli

Although I'm bullish on India and Indonesia because they show that Asia isn't all about China, by no means do I think they are the only developing countries in the region with promise. Any list of the top-five investment opportunities in Southeast Asia would have to include Thailand and Vietnam, both of which have robust middle classes, one of the hallmarks of a developing market. In many cases, it's the middle class that supports the policy changes necessary to move a country successfully towards capitalistic democracy.

Vietnam has the fastest-growing middle class in Southeast Asia. It is expected to more than double in size from 12 million now to 33 million in 2020, according to a survey by Boston Consulting. However, those numbers do not make the middle class dominant, considering the 2020 population is expected to top 100 million.

It's by no means certain that the rise of the middle class in the labor force will play a very important role in helping recover the country's dynamic economy since the fundamental political problems in Vietnam have been around for a long time.

The Vietnamese National Assembly has been compared with the House of Lords in the United Kingdom in that, although it's very much part of the establishment — the general population is able to sit in on National Assembly sessions — it doesn't have very much power. That said, it has some bit of power, and sometimes that bit is used to produce better legislation and improved outcomes.

Meanwhile, China's direct investment in Vietnam soared 7.1-fold to $2.27 billion in 2013 on an approval basis. This put China ahead of Japan and behind only South Korea and Singapore.

Vietnam's economic dependency on China continues to deepen, but the countries' political relations are showing signs of strain.

Unlike Thailand, Vietnam shares both a common border and common animosity with China. Distrust of China tends to run deep, a result of three hundred years of armed conflicts, including China's 1979 invasion of Vietnam that killed an estimated 40,000 on both sides.

Beijing strengthened fishing regulations in the South China Sea last month. The move was not received well in Vietnam, where it sparked the first anti-China demonstration in seven months in Hanoi.

While China is Vietnam's largest trading partner by a substantial margin, it is not responsible for the largest share of exports or of foreign direct investment.Vietnam's major export markets are, in order starting with the largest, the EU, U.S., the ASEAN countries, Japan and China.

In 2012, the top three countries investing in Vietnam were Japan ($5.13 billion), Singapore ($1.72 billion) and South Korea ($1.17 billion). In recent years, Beijing has loaned more than $1 billion to Hanoi for infrastructure development.

Still, there are ties that bind. As wages rise in China, many Chinese businesses have moved their production to lower-cost Vietnam. To pave the way for these relocations, both sides have agreed on reforms to ease cross-border investment.

Investment opportunities in Vietnam are limited. The lone ETF is Van Eck's Market Vectors Vietnam ETF VNM -0.30% , which owns shares of 29 industrial, financial and oil/gas/energy companies. Two Vietnamese companies provide investment opportunities for intrepid investors. Dragon Capital , which claims to be the second-largest investor in the Vietnamese stock market after the Vietnamese government, offers two funds. Vietnam Asset Management Limited offers four Cayman-registered Vietnam-specific funds, which are open to public and institutional investors globally.

Both Thailand and Vietnam are solid developing-market plays, though at different points in their advancement. Vietnam's middle and affluent class is growing so rapidly that by 2020, that population will be two-thirds the size of the same class in Thailand. In the future, I'll look at how Thailand resolves these challenges will dictate its future course and its suitability for increased investment. Meanwhile, Vietnam is still developing and will be on the upswing for some years to come.