“Vietnam is a particularly attractive frontier market country.”

—Benjamin Shepherd, Global Investment Strategist 

McDonald’s (NYSE: MCD) is the latest U.S. company to arrive in Vietnam. Last week, the first Golden Arches opened in Ho Chi Minh City, the country’s biggest metropolis.

In many ways, the burger giant is a latecomer to Vietnam.

The rival KFC chain, controlled by Yum! Brands (NYSE: YUM), has been there since 1997 and now has 135 locations. The Colonel’s arrival came shortly after the U.S. normalized trade relations with the country in 1995.

Burger King (NYSE: BKW) showed up in 2011 and now has 29 locations. Starbucks (NYSE: SBUX) opened its first outlets just last year.

(Right now, we’re recommending a little-known—at least in the U.S.—fast-food chain that beat its rivals to the punch in Vietnam. The stock has already racked up 228% gains for us, and it’s just getting warmed up. Get full details in our new special report, “The Next McDonald’s,” available here.)

Educated, Low-Cost Workforce Attracts Foreign Investment

Vietnam has been on the radar screen of Benjamin Shepherd, chief strategist of our Global Investment Strategist newsletter, for some time:

“Vietnam has a strong demographic profile, with more than 60% of its 86 million people under the age of 35 and in their prime working years,” he wrote in a December 2013 article. “The country also has a relatively modern and stable infrastructure, with more than 90% of it enjoying access to electricity, compared to 30% for Myanmar.”

The country’s gross domestic product rose 5.42% in 2013, up from 5.25% in 2012 and ahead of the 5.3% economists expected. Forecasts call for 5.5% growth this year.

“The economy is steadily recovering,” Fiachra MacCana, managing director of Ho Chi Minh Securities Corp., said in a December 22 Bloomberg article. “Exports are still the main driver, especially for Vietnam’s manufacturing sector, but there’s a little bit of domestic backup there. It’s a broad-based recovery.”

Exports jumped 15.4% from 2012, as more manufacturers set up shop in the country to take advantage of its low-cost labor: wages for unskilled workers in Vietnam are about 32% of those in China and 43% of levels and Malaysia and Thailand.

“That has attracted export-focused manufacturers, such as Bridgestone (Tokyo: 5108, OTC: BRDCY), the world’s largest tire maker, which has spent more than $1.2 billion on a manufacturing facility in the northern port city of Haiphong,” wrote Shepherd. “In 2011, 208 Japanese companies alone established operations in Vietnam.”

The country’s workforce is also well-educated: 93% of the population is literate, according to the World Bank, and 98% of primary-school-aged children are enrolled, based on 2011 figures from Unicef.

A Standout Among Emerging Markets

The early part of 2014 has been tough for emerging markets, with stock markets in many, such as India, Turkey and South Africa, falling sharply. Currencies have also plunged, prompting some countries to sharply raise interest rates.

That’s partly because the Federal Reserve has begun reducing its monthly bond purchases, known as quantitative easing, encouraging investors to bring their money back to more stable markets like the U.S. In addition, countries like Thailand continue to be plagued by political unrest, and weaker manufacturing numbers out of China have raised concerns about that nation’s economy.

However, Vietnam has mostly avoided the turmoil. Its currency, the dong, has traded at around 21,000 to the dollar for about two years. Its inflation rate was 6.0% in 2013, still high by Western standards but down from 6.8% in 2012 and well below the government’s 8% target.

“The Vietnamese government has also been busy cleaning up the balance sheets of its banks, which had become bloated with bad debt thanks to the ‘anything goes’ mentality prior to the global financial crisis,” wrote Shepherd in a February 5 Global Investment Strategist article. “As a result, non-performing loans at Vietnamese banks are believed to have grown to nearly 20% of assets just a few years ago.”

“However, the government stepped in and began purchasing non-performing loans in exchange for zero-coupon bonds, then allowing banks to borrow as much as 50% of the value of the bond from the government. This program has allowed banks to remain solvent while actually growing their loan books.”

Over the course of this year, the government also plans to raise foreign ownership limits in many of the country’s industries from 49% to 60%. That should help it attract more foreign investment, says Shepherd.

An Easy Way to Invest in Vietnam

While Vietnam is an attractive market for 2014, it remains relatively difficult for individual investors to access. One option is through the Market Vectors Vietnam ETF (NYSE: VNM).

The exchange traded fund holds nearly 37.0% of its $417.8 million in assets in Vietnam’s financial sector, where earnings have been improving on a year-over-year basis, largely thanks to slowing bad debt growth.

Another 24.6% of its assets are in the country’s energy sector, and the remainder are spread across smaller allocations of less than 12% to consumer stocks, utilities, industrial and materials companies. The ETF’s expense ratio is 0.76%.

Don’t miss our new special report, “The Next McDonald’s,” which reveals one of Shepherd’s top growth picks right now. This red-hot fast-food chain has already built a loyal following in Vietnam and is taking direct aim at the Golden Arches here in the U.S. This exclusive report is yours free when you try Global Investment Strategist now.

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