“You have a sudden surge of fear” because of the government’s devaluation, especially after Dubai’s proposed delay of debt payments, Templeton Asset Management’s Chairman Mobius said in an interview today in Hanoi.

Among Asian stock markets, “the biggest risk now is Vietnam,” said Mobius, who oversees about $25 billion of emerging-market assets and has about $1 million invested in Vietnam. “The government is taking measures which may cancel out each other.”

The country’s benchmark VN Index is the second-worst performing stock gauge in the world this quarter in dollar terms, after the central bank devalued the dong by 5 percent and raised interest rates to combat inflation and a widening trade deficit. Standard Chartered Plc warned that policy makers risk fueling bets for further weakening in the currency.

Non-deliverable forwards in the dong signal traders are predicting a 12 percent decline in the exchange rate in 12 months from a spot rate of 18,492 as of 11:56 a.m. in Hanoi. The unofficial rate offered at gold shops in Ho Chi Minh City is 4.4 percent weaker than the spot rate. A 10 percent drop in the black market suggests the currency may depreciate another 14 percent.

Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars.

‘Confusion, Uncertainty’

In U.S. dollar terms, Vietnam’s benchmark share index may lose as much as 15 percent in the next three to four months, Mobius said. “It can happen very quickly.”

The VN Index declined 16 percent this quarter and has dropped 23 percent since reaching an 18-month high of 633.21 on Oct. 23. It snapped a five-day loss today, rising 1.7 percent to close at 490.62.

“On one hand they’re devaluing the dong, on the other hand they’re increasing money supply in order to keep economic growth going, and they’re raising interest rates,” Mobius said. “When there’s confusion and uncertainty, you know what happens, people sell. They don’t want to stick around.”

The dong is headed for a second annual decline, down 5.5 percent this year. It is the second worst-performer among currencies of Asia’s 17 biggest economies in 12 months, after the Kazakhstan tenge.

Government Intent

Vietnam this week became the first in Asia to raise borrowing costs to help temper inflation, which reached a six- month high of 4.35 percent in November. Credit growth quickened to 34.5 percent this year through November, prompting the rate increase, Thoi Bao Kinh Te Vietnam newspaper reported yesterday, citing central bank Governor Nguyen Van Giau. The full-year target is 30 percent.

The State Bank of Vietnam lifted the benchmark rate 1 percentage point to 8 percent. Policy makers also allowed the currency to drop 3.4 percent yesterday.

“It could be positive for the stock market in the medium term as it signals the government’s intent to be proactive in managing the currency and inflation, whilst at the same time removing some of the uncertainty around the dong exchange rate,” said Desmond Sheehy, a managing director at Singapore- based investment manager Duxton Asset Management.

The trade deficit widened to $1.75 billion in November, according to preliminary figures from the General Statistics Office in Hanoi released yesterday, compared with a revised $1.6 billion last month. Exports fell 11.4 percent in the January- November period from a year earlier.

Domestic Demand

The decline in Vietnam’s stock index may be a good opportunity to buy companies that will benefit from rising domestic demand in Vietnam, especially because the $91 billion economy is growing about 5 percent annually, Mobius said.

Mobius said he’s interested in tourism, real-estate companies, retailers, port operators and the banking sector. He declined to name specific companies.

“Vietnam has some of the cheapest stocks probably in the world right now,” he said. “If these corrections are big enough, we’d be in buying more of these equities.”

By Beth Thomas - Bloomberg - November 27, 2009