Vietnam's underperforming stock market has thrown the spotlight on investment opportunities in the country, where sectors from banking to retail to insurance are on the radar of private equity firms and fund investors with an appetite for frontier market risk.
The risks to investing are significant, and include this month's 8.5 percent currency devaluation, as well as sovereign downgrades from Moody's and Standard & Poor's in December.
The country's main stock index .VNI has dropped 10 percent in the past week after the government announced new measures to curb double-digit inflation.
The market is among the worst performers in Asia, limping in with a 4.4 percent rise in the past six months versus a 10.3 pct gain in Thailand's SET index .SETI and an 8 percent rise in Shanghai's stock index .SSEC.
"Purely from a valuation point of view, it's a good time to invest in Vietnam," said Anand Ramachandran Prasanna, an investment associate at Squadron Capital, an Asia-based private equity fund-of-funds manager.
Chinese stocks in Shanghai are trading at a trailing price to earnings ratio of 17.4, versus 17.1 for Bombay .BSESN. Vietnam trades at 9.9, according to Thomson Reuters data.
"If you have the risk appetite, it's a high-risk, high-return opportunity," Prasanna said. He warns that it's tough to assess long-term private equity returns because of the same economic uncertainties that create the valuation opportunity.
Apart from economic uncertainties, corruption, lack of transparency and bureaucratic red tape top analysts' list of risks in Vietnam.
But two recent foreign investments reflect the attraction of Vietnam, a developing country with a youthful population of more than 80 million in a region where dealmakers are keen to find investment alternatives to China and India.
Over the past decade, Vietnam has emerged from the hangover of war to play a central role on Asia's factory floor, producing everything from footwear to computer parts.
The country also offers the chance to invest early in an underdeveloped consumer market with strong growth. The country's economy grew 6.78 percent in 2010 and exceeded the official growth target.
Vietnam is aiming to clock annual GDP growth of 7.0-7.5 percent in the next five years.
Bankers expect more action after a series of recent high-profile deals. Last month, Diageo Plc, the world's biggest spirits maker, took a 23.6 percent stake in Hanoi Liquor Joint Stock Company for $33 million from local private equity firm VinaCapital Vietnam.
US private equity firm Mount Kellett Capital Management made a $100 million investment in private sector conglomerate Masan Group's unit Masan Resources, marking the largest private equity investment in Vietnam, according to Thomson Reuters data.
Masan's management is actively seeking investments for its other arms, which include food and banking, as they look to grow the company into a proxy for the Vietnamese economy.
TPG Capital invested $35 million in Masan at the group level in 2009, and there is talk that global buyout funds are circling the company's food division, as well as Viet Thai International, a food retailer focused on the country's emerging middle class, bankers say.
"If you're in China, you want to sell shoes and milk to people, so people are trying to figure out the same opportunity in Vietnam," a Hong Kong-based investment banker said.
The country's small to mid-sized banks, particularly the joint stock banks, will be in focus next year, as many of them need to increase their capital, Kelly Wong of Ho Chi Minh Securities Corp said.
"A number of securities companies are also going to be put into play," he added. Privatization of state-owned enterprises offer more investment opportunities.
The government is currently selling up to a 20 percent stake worth around $600 million in PetroVietnam Gas Corp, while PetroVietnam Insurance Co's non-life insurance arm is also seeking a second round of investment after Oman Investment Fund bought a 12.6 percent stake of the enlarged share capital in 2010.
"People are pulling out the private equity playbook from 10 years ago, and saying, "˜Okay, this is a new market, what do we do, we do banks,' so people are looking to invest in the banks," said the Hong Kong-based investment banker, who did not want to be named because he was not authorized to talk to the media.
Investors are equally bullish on Vietnam and just before the recent pull back, institutional investors were drawn to Vietnam by its attractive valuation.
For instance, offshore Vietnam-dedicated mutual funds attracted nearly $63 million in December, their highest monthly inflow since May 2008. Net inflows into Vietnam-dedicated exchange traded funds more than doubled to $364 million in 2010 from 2009.
Vietnam-focused mutual funds saw outflows of $6 million in January, while exchange traded funds (ETFs) saw inflows of $85 million.
Franklin Templeton's emerging markets head, Mark Mobius, is also betting on Vietnam. Mobius said he expected his fund's investment in Vietnam to increase, but regulatory hurdles and slow market reforms would limit the pace.
At risk to long-term valuations are the economic problems of a government that is seen by some as profligate.
"The country is at a crossroads. If they can get the M2, trade balance and currency sorted out, then it can be a great time to invest," Squadron's Prasanna said.