Territorial clashes with China have pushed Vietnam's shares down more than 10 percent over the past month and even though tensions haven't eased, some analysts are tipping a bargain buying opportunity.
"Political friction with China is nothing new, but the recent action is admittedly quite aggressive and rekindled the dispute between Vietnam and China that had been dormant for months," CIMB said in a note Monday.
But it added, "Stock prices are likely to rebound once the current situation inevitably dies down. We believe that there is limited downside from here, assuming no shooting actually breaks out."
Vietnam became a frontier market darling in the first quarter, with the benchmark index shooting up over 20 percent from the beginning of the year until it touched a high in mid-March. Since then the index has dropped more than 16 percent, with a drop of nearly 12 percent so far in May.
But CIMB noted that its local partner, retail broker VN Direct, estimates margin-funded positions have dropped by about half over the past few weeks to around $250 million, indicating liquidation-driven selling is likely mostly done.
Last week, tensions flared up in the South China Sea after a Chinese state-run oil company placed an oil rig in an area claimed by Vietnam, with both countries claiming the other had rammed its ships. Both countries have dozens of vessels in the area.
"The current muscle flexing by China appears to be a theatrical, albeit aggressive, response to President Barack Obama's reiteration during his trip to Asia last month of America's commitment to protecting Japan and the Philippines," CIMB said.
Kevin Snowball, CEO at PXP Vietnam Asset Management, also sees a buying opportunity.
"(The selloff) is essentially wiping out all the gains year-to-date. It was a reasonable buying proposition at the beginning of the year and now it's back to the same level," Snowball said. "The market is cheap" at around 12.5 times 2014 earnings and 10.2 times 2015 earnings, he said although he noted shares may get a bit cheaper from here.
PXP Vietnam, which had around $150 million under management at the start of the week, but has since seen that slip to around $140 million, is considering raising more funds to invest in the market there, he said.
To be sure, expectations for a share rebound depend heavily on keeping the situation from escalating.
"I don't think it'll go as far as war," Snowball said. "Obviously, there have been a couple thousand years of not necessarily friendly relations between Vietnam and China," he said, but added, "war isn't going to benefit anybody." He noted that with neither the U.S. nor the Association of South East Asian Nations (Asean) taking a strong stance, Vietnam is "standing alone," which may help spur it toward a diplomatic solution.
Others also believe the tensions will be dialed back in the near term.
"Beijing is very mindful not to turn this into any kind of major shooting match. I think we will see them drawing away from any kind of rhetoric or maritime maneuver that's likely to bring them into direct contact with the Vietnamese," Steve Wilford, director for Asia Pacific at consultancy Control Risks, told CNBC Monday. "It won't want to push this to the brink," he said, noting China has a "huge" trade relationship with Southeast Asia.
But he added, "you can't overlook the potential for miscalculation," especially as the last country China went to war with was Vietnam in 1979.
That's not the only headwind for a stock market recovery in Vietnam.
CIMB noted the tensions came just as sentiment was taking a hit from disappointment over the progress of key reforms, including efforts to clean up banks' non-performing loan (NPL) problems.
The decision to delay until the end of the year a reform aimed at compelling banks to accurately report their NPLs weighed the market, CIMB noted. Banks have been self-reporting a 3-4 percent system-wide NPL problem, but the central bank says it is around 7-8 percent and many analysts believe the actual figure is around 15 percent, it said.
"The market sell-off started as soon as the delays in key reforms and slow progress in NPL clean-up were announced so it's obvious that the only way to get the market back up is to resume the reforms," CIMB said. It expects reforms will resume later this year as it believes the government is very motivated to "keep foreign investors happy" as economic growth has been driven by foreign investment amid weak domestic demand.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1