While market timing is nearly always a difficult game anywhere, Vietnam has long proven to be especially hard to play. As a non-market economy, mechanisms to bring demand and supply into equilibrium are poorly developed. And rigidities in some aspects - a managed exchange rate, for example - can result in dramatic adjustments in the price of other, more market-based assets.

The stock market surge was sparked by strong demand for a limited supply of equities. At the start of last year, the market capitalisation of the 30 companies traded on the country's main stock exchange, the Ho Chi Minh Securities Trading Centre (HOSTC), was just US$510 million.

Spurred on by a Merrill Lynch report heralding a '10-year bull market in Vietnam', and a slew of new listings as companies moved to take advantage of a tax break, it ended the year with a market cap of more than US$9 billion and with 107 companies listed.

The VN Index stood at 1,138 at the end of last month, up from 751 at year-end. As in China, the authorities have tried to talk down the market this year, fearing perhaps that a 10-year bull market has been squeezed into one year.

But the tug in the other direction is likely to be stronger. Pro-reform leaders elevated at last year's Communist Party congress are fearful that a slump will slow the planned listings of larger state-owned enterprises over the next few years.Prime Minister Nguyen Tan Dung gave added impetus to the market reform last month when he urged that 'equitisation' - Vietnam's favoured term for privatisation - of the big four state-owned banks plus Mekong Delta Housing Development Bank be speeded up, starting with the listing of the second-largest bank, the Bank for Foreign Trade of Vietnam (Vietcombank), in the third quarter.

Despite its relatively small size - assets have doubled to more than US$10 billion since 2001 - the bank has appointed Credit Suisse as an adviser.

'There appears to be a considerable degree of agreement on the need for banking system reform at all levels of government', said Patrick Winsbury, a senior banking analyst at credit ratings agency Moody's Investor Services. 'In part, [it's] because policymakers appear to understand the importance of a strong banking system in supporting sustainable economic development ... [although] bank regulation remains politicised.'

This is all part of Mr Dung's drive to accelerate economic change, lending support to the market. Last month he ordered construction time for a US$33 billion high-speed railway between Hanoi and Ho Chi Minh City be slashed from nine years to six.

So far, the combination of much lower land and labour costs - and less risk of trade sanctions - than in China have spurred Vietnam's GDP to grow at 7 to 8 per cent a year over the past five years. But the country suffers from inadequate infrastructure to meet the needs of the foreign direct investors setting up factories, one of the keys to the mainland's rapid rise.

As recently as two years ago, there were just three major funds in the country, as slow decision-making by officials persuaded foreign portfolio investors to look elsewhere. Even after the country experienced rapid export growth due to the signing of a bilateral trade agreement with the US six years ago, fears that the costs of integrating into the world economy would outweigh the benefits lingered in the corridors of power. Fears of foreign domination remain. As a tour guide was heard to say a few years ago: 'We had the Americans for 10 years, the French for 100 and the Chinese for 1,000.'

But such suspicions are easing. In January the country became a member of the World Trade Organisation. With its private sector providing the bulk of new jobs for the 1 million-plus people entering the labour force every year, investment opportunities are growing rapidly.

How to tap these opportunities? According to Don Lam, managing partner of the Ho Chi Minh City-based VinaCapital - which manages the US$757 million Vietnam Opportunity Fund (VOF) and US$206 million VinaLand Fund - the best prospects are in 'property, due to a huge demand for housing among the young, tourism and consumer-goods categories such as food and beverages'. Three-quarters of the country's 84 million people are under 35, presenting a growing consumer market.

More than 10 Vietnam-focused equity funds were set up last year around the world. Most were institutional and high net worth-targeted. Last November Jardine Fleming's US$98 million Vietnam Opportunities Fund became Hong Kong's first fund targeting the country to be authorised by the Securities and Futures Commission - meaning it can be marketed to retail investors in Hong Kong.

Offshore funds with longer track records include - since 1995 - Dragon Capital's US$745 million Vietnam Enterprises Investments Limited (VEIL), as well as Vina Capital's VOF and PXP Asset Management's US$135 million Vietnam Fund, both of which have operated since 2003. According to LCF Rothschild Country Funds Research their dividend adjusted net asset value (NAV) rose by 192.7 per cent, 81.3 per cent and 194.3 per cent respectively between the start of 2006 and the end of January, against a peer group average of 115.3 per cent.

But while the NAV of VinaCapital's VOF has grown more slowly, its AIM-listed shares traded at an 18.2 per cent premium to NAV at the end of last month. That doesn't mean investors are willing to pay more for the fund than the combined value of its holding. Instead, Mr Lam says, the discrepancy is due to the fact that in addition to listed and over-the-counter shares, which are marked to market, the fund does private equity and real estate investments, which are booked at costs until there is a third-party transaction.

As is the case with other Vietnam funds, the premium at which the VOF trades has declined recently - a sign there is a slight toning down in giddiness about the country.

Nevertheless, the market remains one characterised by excess demand for a limited supply of stocks, with only a handful of large companies listed. February 27, for example, marked the first day in the HOSTC's history that all stocks recorded gains. And both domestic and international investors seem eager to get their piece. Jardine Fleming's fund was fully subscribed in one day. In the press release announcing the fund's launch, its manager - Mayur Nallamala - crowed that the 'stock market cap has the potential to rise over four times by 2010 to US$14 billion'.

But in a sign of how rapidly the market is moving, the 49 companies listing on the HOSTC in December 2006 alone propelled the combined market capitalisation of the exchange above Mr Nallamala's level already - and the market's average price-to-equity ratio no longer lags China's - with larger cap stocks such as Sacombank (Saigon Thuong Thin Bank) and Vinamilk (Vietnam Dairy) recently trading at P/E ratios of 80 and 50 respectively.

The prospectus for Jardine Fleming's fund also gave a more optimistic scenario of 'US$45-50 billion listed market by 2010' based on hundreds more 'equitisations'. As Geoff Lewis, Head of Investment Services at Jardine Fleming puts it, 'there are reasons to be hopeful'.

In a reminder of the dangers posed by an ambitiously developing country like Vietnam, Templeton Asset Management - Mr Freund's former employer - launched the first US-listed closed-end fund to invest in publicly traded companies based, or operating, in Vietnam. However, while the government had promised to launch a stock market there by 1996, HOSTC only came into being in 2000 and the smaller Hanoi Securities Trading Centre (HASTC) was established in 2005.

With no local bourse, Templeton's Vietnam Opportunities Fund ended up buying shares in companies operating in Vietnam but trading in Hong Kong, Malaysia, Singapore and Thailand and struggled to invest the fund's assets.

According to reports at the time, fund investors sued manager Mark Mobius and Templeton for not doing what was promised - investing in Vietnam. In 1998, the legendary fund manager beat a proxy fight to liquidate the fund and got approval to change the fund's mandate to include Southeast Asian stocks. It was later merged with another fund. Likewise, the other funds that had been set up at that time have been wound up, leaving only Dragon Capital's VEIL from the first batch of funds set up in the early 1990s.

Now that there is a local bourse to invest in, Dr Mobius has been reported as citing a lack of liquidity as a reason for not rushing into Vietnam. Undoubtedly, there are reasons to be cautious - and Mr Freund, who manages the US$27 million Mekong Enterprise Fund, still is.

'The underlying fundamentals have improved dramatically since the mid-90s - the private sector is flourishing, 3,000 former SOEs have been privatised and more will be privatised soon, consumer spending power has grown dramatically, capital markets are developing rapidly, and the legal foundations much stronger than before,' he wrote in an email reply last week.

'There are certainly some better companies, with better management, in which to invest now. However, financial markets always overshoot, and it seems to me that the sense of urgency that many investors feel to get exposure to Vietnam is similar to the peak in 1994/1995.

'Back then, many investors thought that a rising tide would lift all boats, but many boats didn't have good captains and got lost at sea. There's still a severe shortage of capable managers, and serious internal control and transparency risks.'