Vietnam's stock market, which tumbled nearly 30 percent last year because of surging inflation and a declining currency, is the most undervalued market in Southeast Asia, David Roes, the CEO of Asean Investment Management, told CNBC on Friday.
He expects the market to more than double over the next two years as inflation and bank deposit rates fall.
"During the Asian financial crisis in '98, you had countries (like) Indonesia, Thailand which had huge amounts of inflation and very high levels of bank deposit rates,
similar to where Vietnam is coming out of," Roes said. "You took a look at how they performed, they have also done similar outperformance levels of what we are indicating for Vietnam."
Consumer prices in Vietnam rose 17.3 percent in January over the previous year, but it was the fifth straight month that inflation slowed. Roes accepts the rate is still high, but he says the trend is more important for equity investors.
Foreign investors have already been rushing in. The benchmark index has risen nearly 15 percent this year.
Roes especially likes banks, brokers, real estate and construction companies that have been beaten down by low market volumes, high financing costs and the negative sentiment last year. He says investors in these sectors can expect "super-normal" returns of 400 to 800 percent over the next 36 months.
Similarly, he sees strong returns for other interest-rate sensitive sectors such as consumer finance and durable goods. He says there are some stocks in Vietnam that offer investors "deep value", while also paying a good dividend yield and offering future growth.
He says such stocks can be found across multiple sectors. He highlights the country's cement stocks, which he says are trading at one-fifth the valuation levels of Indonesian cement stocks.
Roes says the cement industry in Vietnam trades at a price-to-earnings (PE) ratio of between 2 and 3 times and price to book values of between 0.3 and 0.6, while paying dividend yields of 20 to 30 percent. One specific name he likes is Hoang Mai Cement, which he says trades at a current PE ratio of 2.6 and whose dividend yield in 2011 was 19 percent.
"Whenever you find that combination where you've got value, you've got growth and you've got current income, it's usually a very good investment to make."
One downside is the higher volatility in Vietnamese stocks. Roes says it's not unusual for the market to make moves of 100 percent in a relatively short period of time, but he says the key is to be well diversified.
"The traditional concept of diversification can limit some of that risk if you don't have the capacity to fully understand a specific company risk. At this stage, sector selection is much less important, or specific company selections are much less important, than allocating assets to the country as a whole and of course having a diversified basket."
Disclosure: Asean Investment Management has a position in Hoang Mai Cement.