Why Vietnam’s positives aren’t boosting stocks

Stock prices are shown on a ticker outside a securities firm in Hanoi, Vietnam.
Justin Mott | Bloomberg | Getty Images
Stock prices are shown on a ticker outside a securities firm in Hanoi, Vietnam.

Vietnam's economy seems to have it all – good demographics, rising incomes and growing consumption – but that's not good enough to translate into stock market gains.

"Undeniably, Vietnam boasts a strong demographic destiny. This has helped with the country's labor cost competitiveness and domestic demand. Sustained growth of disbursed FDI (foreign direct investment) signifies the country's attractiveness as a manufacturing hub," Trinh D. Nguyen, an economist at HSBC, said in a note this week.

But what's good for Vietnam's foreign investors doesn't appear to be helping the domestic ones much, she said.

Read More Is this Asia's new manufacturing hub?

"Domestic enterprises have not been as successful in capitalizing on Vietnam's cheap labor pool," Nguyen said, noting their exports contracted in both the fourth quarter of last year and the first quarter of this one, even as foreign-invested firms saw their trade surplus rise.

It's quite a labor pool too, with more than 60 percent of the population clustered in the prime 15-54 working-age range and around 6 percent of the population over the age of 65, with the median age at around 29. That compares with Japan's median age around 46 and China's around 37.

But so far this year, the VN Index has edged up just 0.5 percent, but it's off around 9 percent from its early March peak; on Friday, the index was up around 0.5 percent in early trade. The U.S.-listed Market Vectors Vietnam exchange traded fund (ETF) has done even worse, falling around 13 percent so far this year.

Tourism isn't providing much support either, as a resurgent Thailand and a stronger local currency ate into one of the country's main foreign-exchange earners, Nguyen noted, citing data showing first-quarter tourist arrivals dropped nearly 14 percent on year.

Set to end?

Some even question whether Vietnam's demographic dividend will persist much longer.

Read More Vietnam property: No-man's land no more

"The main driver for population growth is changing. It used to be high birth rates. Now it is increasing life expectancy," noted a report from the U.K. Foreign & Commonwealth Office earlier this year. The overall birth rate is already below the replacement level and in just 20 years the proportion of the population over 65 will double, it said.

Even Vietnam's wage competitiveness could come under fire. In 2013, Vietnam's average monthly wage was $197, well below Thailand's $391, China's $613 and Malaysia's $651, according to data from the International Labour Organization. But the country may face increased labor action, with a rare six-day strike at a large footwear factory employing around 80,000 ending this week with the government caving in to worker demands over social-insurance law changes.

Additionally, the country faces a skilled labor shortage as tertiary education isn't keeping up with corporate demand, Nguyen noted.

Just a hiccup?

To be sure, some expect the stock market decline is just a hiccup.

One of the main reasons the index is down is because PetroVietnam Gas, accounting for around 12 percent of the index, has dropped sharply on a combination of low oil prices and its failure to execute a share buyback, Kevin Snowball, CEO of PXP Vietnam Asset Management, said in a note this week.

"The Vietnamese economy is in the best shape it has ever been; the market, as a result of recent weakness is now extremely cheap," Snowball said, noting that the stocks covered by PXP are trading at around 11.6 times this year's earnings and 10.6 times next year's.

In the first quarter of this year, Vietnam's gross domestic product (GDP) rose 6.0 percent on-year and the Asian Development Bank is forecasting 6.1 percent growth for the full year.

Raising the 49 percent limit on foreign ownership of stocks to 60 percent -- a much-delayed proposed reform -- is another catalyst on the horizon, Snowball said, adding he expects an announcement by the end of July.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1