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It's Like You're Investing in South Korea – Back in 1961

When China reported stronger-than-expected export numbers last week, global investors were quick to jump back onto the China bandwagon.

China stocks rose, and share prices rallied throughout Asia. The bullish sentiment carried over into U.S. stocks – and into other asset categories, too. Oil and copper rallied. So did such trade-sensitive currencies as China's yuan (renminbi), and the Australian and New Zealand dollars.

A week later, we find that a number of analysts are questioning the validity of those numbers – which then raises questions about the actual strength of China's rebound from a period of slower growth.

It's turning into a pretty heated spat, which isn't surprising, since there's a lot riding on China's economic outlook – especially in the near-term.

If the controversy has left you feeling confused, here's a three-point strategy that will bring you some major long-term profits:

  • Ignore this near-term "noise."
  • Position yourself for the long-run.
  • And give some serious consideration to Vietnam.

We first talked about Vietnam early last year, with the April 19 Private Briefing report "How to Travel the Global Path to Maximum Wealth," and added analysis and insights with the May 29 column "Invest Now – And Guarantee Yourself a Decade or More of "Rapid Growth."

Given the deep disagreements we're now seeing over last week's China trade report, it's time to revisit this long-term profit play.

At its current stage of development, Vietnam is what's known as a "frontier" market – one with a smaller market cap and lesser liquidity than many of its "emerging" counterparts … but one that offsets these higher potential risks with a greater potential for windfall profits.

I'm writing to you about Vietnam in relation to the China trade numbers for one simple reason: Vietnam will be a big beneficiary of China's development into an economic heavyweight – and that's going to continue for years to come.

You see, as China moves forward, its standard of living has increased, which causes wages to rise. The low-end manufacturers who originally left places like the United States, Europe or Japan because of wage costs now face the same challenges in China.

With wages that are about half that of China's, Vietnam has been – and will continue to be – the main beneficiary of this wage-rotation play. And China's policy shift toward increased domestic consumption will also be a boost to Vietnam, which is becoming an outsourcing center for its much-larger benefactor.

In a recent research report, Neena Mishra, ETF research director at Zacks Investment Research in Chicago, wrote that powerful economic trends are positioning Vietnam as a terrific long-term profit play.

"Even though Vietnam is a communist country, they have market-friendly policies" in place that are attracting billions in foreign-direct investment, Mishra wrote. "Vietnam's GDP increased by more than 8% annually from 2003 to 2007, before the global recession hit the export-oriented economy. Per IMF estimates, the economy slowed down to 5.1% in 2012 from 5.9% in 2011 but will rebound in 2013 to 5.9%. [And now] Positive demographics further support future growth prospects."

Vietnam's poverty ratio has fallen from 58% in 1993 to about 14% in 2010. (For comparison, consider the fact that, in November, the U.S. Census Bureau estimated that the U.S. poverty rate would spike to 16% of the population, and said the poverty rate among America's children was 20%. That's the highest level since the early 1990s.)

Underscoring our point that Vietnam is a long-term profit play, consider this point: Accounting-and-consulting firm Ernst & Young recently projected that the Vietnam economy would grow at an average annual rate of 6% over the next 25 years, and predicted the country's per-capita income would grow six-fold over the same period.

A recent Investor's Business Daily (IBD) report said "the dynamic, resource-rich country is the world's second-largest exporter of coffee, after Brazil, and of rice, after Thailand, and it's a net crude-oil exporter, too. Taking a page from China's consumer playbook, its middle class is rising rapidly from a young and well-educated population of 88 million. But they're willing to work for lower wages than the Chinese, so manufacturing accounts for about half of an economy that's growing 6% a year."

If you haven't invested already, now may be the time to make your move – or at least to establish an initial position.

The reason: Despite that country's growth profile, its stocks are cheap – very cheap, says Mark Mobius, the global-investing pioneer who is the executive chairman of the Templeton Emerging Markets Group

Vietnam's fast-growing pharma, food and rubber-plantation companies are trading at only five to seven times earnings, Mobius told IBD. And that makes them 30% to 50% cheaper than their developed-economy peers.

The kicker: These stocks boast dividend yields of 4% to 6%.

"The key word for Vietnam at this stage of the game would be valuation," Mobius said. "Generally speaking, it's quite attractive."

Make no mistake: Vietnam faces some pretty big structural challenges. Public enterprises account for as much as 40% of the country's economy, and are inefficient and wasteful. And many observers question whether Vietnam's leaders have the fortitude to tackle this issue, given the close ties many of these companies have to Communist Party officials.

But we've seen some positive developments on this front.

In July, for instance, Prime Minister Nguyen Tan Dung approved proposals to boost the profit margins and overall competitiveness of state-operated firms. Indeed, selling shares in some state-run ventures will be a "key task" until 2015, according to the plan. (However, some companies – particularly those defined as key to economic production or national defense – will remain under full control of the government.)

Then, in September, police arrested the former chairman of an indebted Vietnamese state-owned shipping company for alleged economic crimes. The arrest was made after the ex-official was extradited from a neighboring country.

An undercapitalized banking sector, inflation and a high trade deficit are other challenges that Vietnam must tackle.

Overall, however, it appears that Hanoi is serious about reforms that aim to relax limits on foreign ownership of Vietnam companies, and others that would clean up the banks, Asha Mehta, an investment analyst at Acadian Asset Management recently told Barron's.

And Mehta has a unique perspective on this: Acadian manages accounts for high-net-worth investors with Vietnamese holdings.

Although Vietnam figures to remain highly volatile, some of the world's best companies feel confident enough in the country's future to make major investments there. For instance, Samsung Electronics has moved 40% of its cellphone production to Vietnam. And companies such as Nike Inc. (NYSE: NIKE) and Intel Inc. (Nasdaq: INTC) have announced or followed through with major investments, as well.

The single-best way to invest in Vietnam right now is through the Market Vectors Vietnam ETF (NYSE: VNM), which tries to mirror the price and yield performance of the Market Vectors Vietnam Index.

It does this by spreading the risk across roughly 30 firms, 70% of which are Vietnam-listed. The rest are companies from other countries that do at least half their business in Vietnam, says Rafael Cordero, marketing director of Van Eck Global, manager of the ETF.

To invest for the long haul – which is where the big payoff will be – consider "averaging in" on this ETF. For instance, buy half your intended position now, and divide the remaining 50% up into three equal increments. You can round out your position through regularly scheduled incremental purchases, or you can add the remaining increments if and when the Vietnamese market, or the ETF itself, drops in value – a move that will lower your average purchase price.

Without a doubt, there will be ups and downs – just like any emerging or frontier market, Templeton's Mobius says.

But keep your eye on the prize, he says, because over the next 20 years, "there's no question that Vietnam has the potential to be another Korea."

And that's the kind of payoff we are constantly seeking for you.

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