Foreign investment in the stock market jumped 25 percent last year and the trend has continued in the new year, but analysts warn the good times could be short-lived if the government does not fix the many systemic problems that exist.
Portfolio investors pumped in US$300 million last year as the VN-Index rose 17 percent.
It grew by a further 12 percent in the first two weeks of 2013. Bloomberg has called the Vietnamese stock market the "best" performer this year.
Swiss investment guru Marc Faber has said in his Gloom Boom & Doom Report that Vietnam is among countries worth investing in this year.
There have been some significant transactions between local companies and foreign investors since late last year.
Last month Japan's Mitsubishi UFJ Financial Group bought a 20 percent stake in VietinBank, one of the country's largest partly-privatized public banks, for $743 million.
Earlier this month US private-equity firm KKR&Co. said it would double its stake in a unit of food company Masan Group to nearly 20 percent by investing $200 million.
But analysts sound a warning note. Nguyen Tri Hieu, a director of ABBank, said the investments flowing into the country are not huge and are coming only from investors familiar with Vietnam's business environment.
Others are still waiting and watching, he said. Some overseas institutions he talked to were concerned that the Vietnamese banking system continues to be plagued by "massive bad debts and mismanagement." The housing-market slump also discourages international investors, he said.
It is hard to predict foreign investment in the stock market since it depends on how the government tackles these issues, he added.
Louis Nguyen The Lu, general director of the Saigon Asset Management Fund, said the stock market has just come off the bottom and its rise is not strong enough to attract more investors.
The government should deal with non-performing loans, make the banking sector more transparent, and increase the foreign ownership cap in companies.
"The important thing... is to speed up the equitization of large state-owned companies that are performing well"¦ since the caps for foreign ownership have been reached in listed companies that meet international investors' requirements.
"The stock market will be really attractive to foreign investors once more good shares are available."
The current foreign-ownership cap is 49 percent and 30 percent for banks.
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