Because of its thinly traded market and lack of investment options, global investors often overlook Vietnams potential. Not Merrill Lynch.

Merrill Lynch has acquired a coveted "trading code" needed to buy and sell shares directly on Vietnam's small but growing stock market. Merrill Lynch obtained the right to directly hold Vietnamese shares last week, six months after Spencer White, the bank's chief regional strategist, called Vietnamese stocks a "10-year buy".

Vietnam is slightly larger than New Mexico in size but has a population of 85 million half of whom are under the age of 25 years. Vietnams economic growth rate of 8% is close to that of China and its manufacturing capability has a long way to go representing just 11% of GDP. Wage rates are lower than its neighboring competitors and the service side of the economy is thriving.

I am no fan of the Communist Party of Vietnam but market liberalization and reform is sporadically moving ahead. It is also gradually becoming integrated into the global economy. On May 31st, Vietnam signed a bilateral agreement with the U.S. to accede to the World Trade Organization (WTO) by the end of the year. This was followed by the U.S. Senate's decision to award Permanent Normal Trading Relations (PNTR) status to Vietnam on July 31st - eleven years after diplomatic ties between the two nations were re-established. Vietnam's recent growth has been driven primarily by exports which were up 26% during the first half of this year. Leading the charge is textile and garment manufacturing, oil and mining, agriculture and food processing.

Vietnam has a tiny but growing stock market. With 48 members, 47 listed companies, and one domestic fund, the Vietnam Stock Exchange (VSE) has a current market capitalization of $3 billion. In early 2005, it had a market cap of only $200 million. There were 12 IPOs in the first half of this year but incredibly two companies still account for half of the markets capitalization.

This thin market is volatile and after rising almost 70% in the first part of the year has lost about 30% of its value during the past 12 weeks. Not for the faint of heart. Foreign ownership in listed securities is permitted, but it is capped at 49% for most companies and only 30% for banks.

Still, for long-term, far -sighted investors, the attractions are clear. the young literate workforce that is consumer oriented, a very under developed banking system that is on the cusp of major change, rising foreign direct investment, cost advantages in growing its manufacturing sector, strong export growth, and has huge upside potential as a tourist destination. Its market also offers attractive valuations which according to Merrill Lynch with PE multiples of 8x-10x, EPS growth of 20 per cent-40 per cent and dividend yields range from 3 per cent to 10 per cent.

There is always the risk that reform efforts will falter and corruption and the bureaucratic red tape will continue to challenge even the most persistent and committed company entering the Vietnam market. The country's bureaucracy is as labyrinthine as ever and it has a opaque legal system with separate laws for foreign and domestic investors. Foreign invest investments in companies is capped at 49% and 30% for banks.

In addition, Vietnam, like China is not making any significant progress in the areas of human rights and due process. Recently, staff working for a foreign bank are being held hostage by police until their employer agrees to "compensate" a state-owned bank for the $5.4 million it lost in speculative foreign-exchange trades. Those dealing with China's legal system encounter numerous such cases in that country. In Vietnam, police are allowed to hold suspects without charges for more than a year.

Despite Vietnams potential and my hope for a better life for many in Vietnam living in poverty, I cannot recommend investing in Vietnam at this time.

Even for those who wish to hope for the best, there are only a few direct plays for investors the Vietnam Opportunity Fund (VOF) listed on the London Stock Exchange. It is trading at $2.37 down from a high of $2.62 earlier this year. Another option is the Dublin-listed Vietnam Growth Fund.

Another option is a neighboring country with a somewhat lower risk profile, similar growth potential and more developed market Indonesia. It is also the worlds third largest democracy which is a big advantage over Vietnams Communist government. The Indonesia Fund (IF) is a closed-end fund that is currently in Chartwells Asian Opportunity portfolio. It is up 28% over the past year and its annualized total return through over the past three years through July is an eye catching 40.4%. You can build a small position at current price of $8.48 since the premium to the funds net asset value is only 3.8%, substantially below the norm.

Treat any portfolio allocation to Vietnam or Indonesia as if you were investing in an emerging market venture capital fund. It is a speculative position and will take time to develop.