Liquidity Crunch Slams “Bubble” in Vietnamese Stocks

In February 2007, I visited Ho Chin Minh City, formerly Saigon, as part of an inter-Asian investment tour with my Sovereign Society publishers. I was totally impressed with this bustling city, dominated by strong work ethics, a young population and bulging GDP growth rates of 7.5% a year since 2000.

But after meeting with the director of the stock exchange, I decided to avoid this high-flying market. Stocks in Ho Chi Minh City had already surged more than 300% off their lows a few years earlier and everyone was piling into the market, overloading the exchange’s trading ability. Vietnam had just joined the World Trade Organization and euphoria was endemic everywhere. The exchange’s director was eager to encourage more foreign inflows, naturally talking up Vietnam and its potential. I felt differently, at least about the stock-market.

Twelve months later, Vietnamese stocks, as measured by the benchmark VN Index, have crashed 49% and have collapsed 18% over the last seven trading sessions alone. On Thursday, the market finally mustered a dead-cat bounce, rising 5%.

Though I have no doubt Vietnam will repeat even China’s economic achievements over the next decade, the boom-and-bust cycle in stocks remains alive and kicking in the emerging markets. We’ve all been spoiled by huge emerging market gains since the lows in 2002; in reality, boom and bust cycles continue as markets go from periods of extreme disrepute to excessive optimism, ultimately resulting in a crash.

The way to make big money in these markets is to buy them at the point of maximum pessimism, not at all-time highs. I’ve never purchased an emerging market after a huge rise; I prefer to buy after a crash and just sit tight.

Vietnam is battling a torrid 12% inflation rate and cutting liquidity. Usually an extreme tightening of credit following a big boom results in a crash, not unlike what happened in 1987 or even 1929. Vietnam printed too much dong, its local currency, to absorb a rapid influx of foreign capital; like all central banks, the Vietnamese went overboard and has been busy reigning liquidity over the last several months, draining stock-market flows.

Over the next several months, perhaps sooner, the VN Index will form a bottom. That will mark another great buying opportunity for investors in one of the most compelling Asian tigers since Thailand and Taiwan over 30 years ago and China only three years ago. In London, a few Vietnamese-dedicated funds now trade near their 52-week lows and offer good value. I’ll probably plug one of these funds in upcoming issues of The Sovereign Individual. Stay tuned.