Viva Da Nang

It is important to realize that emerging markets tend to trade at much lower PE ratios than developed markets. Cheaper valuations help to compensate for the risk taken in emerging-markets investing. The VN Index, Vietnam's primary index, trades at 11 times 2005 earnings, which is cheap, but not very cheap. Merrill Lynch also estimates ROE of 29% and a dividend yield of 3.6%. A high dividend is another way to compensate for the risk of emerging-market investing.

The largest public company is Vinamilk, a dairy company that represents 50% of the VN Index's market capitalization; among the top 10 largest companies are three concrete companies and a seed company. As I said, this economy is clearly in its early stages.

Indeed, there are some similarities between Vietnam and China, including high annual GDP growth (Vietnam's 7%-8% vs. China's 9%), a need for infrastructure development and a stock market that is likely to become more popular, internationally, over the next few years.

The risks are many and obvious.

The country is just learning about capitalism, so mistakes will be made along the way in terms of too much growth and not enough restraint.

There is very little liquidity, the market cap of the entire market is slightly more than $1 billion and the daily average dollar volume is just over $1 million (both according to Merrill Lynch).

The government still controls a lot of industry, and has influence over much of the industry it does not directly control. The trend, however, has been for more liberalization and a path to less government involvement. While I believe this will continue, you have to realize that this theme relies on the government increasingly giving up control.

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At the time of publication, Nusbaum was long VTOPF in client and personal accounts, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.