(Editor's note: The following is an edited excerpt of a story that originally ran on IndexUniverse.com's sister European site.)

In the 1990s, investors couldn’t get enough of Asia’s small, fast-growing economies. The flood of money they pumped into markets that simply weren’t ready to handle it resulted in an enormous bubble, followed by a devastating crash in 1997-1998.

Today, all that has changed. China and India are the hot stories, while the rest of the region doesn’t even feature on the radar for many investors. But that could well be a mistake; there is still a good investment case for Asia’s smaller, less fashionable economies.

These smaller countries complement China and India. They should benefit from the rise of their larger neighbours and the region as a whole, while offering exposure to different themes and sectors. More importantly, many of them are available to investors more cheaply than their hotter peers.

Considering Vietnam

The market that is getting the most attention at the moment is Vietnam, where the bull case can be summed up as ‘Vietnam is now where China was two decades ago’. It is a poor country at a low level of development but it has good fundamentals: a young, relatively well educated workforce (given the country’s level of development), low labour costs, abundant natural resources and a steady transition from communism towards a form of capitalism. Vietnam is one of the countries filling the low-cost manufacturing niche for goods such as clothes and furniture abandoned by the Chinese coastal provinces as they move on up the value chain.

In the U.S., the first pure-play exchange-traded product launched in August: the Market Vectors Vietnam ETF (NYSEArca: VNM). You can read more about it here.

There is also one available to investors in Europe, the db x-trackers FTSE Vietnam. This fund's index tracks all the companies in the Vietnamese market that have sufficient availability to foreigners to be investable (Vietnam imposes limits on foreign stakes in companies). It currently includes 27 stocks: raw materials (in which national oil company PetroVietnam predominates) is the largest sector, accounting for a quarter of the basket, followed by financials (mostly real estate). There’s also reasonable exposure to sectors such as consumer goods.

The main omission is the absence of any banks in the financials basket, but this is unavoidable given that there is insufficient free float available to foreigners to make them eligible.

Looking At Malaysia

Nearby Malaysia is a very different type of economy. It went through a period of rapid development in the eighties and nineties, culminating in the region-wide bubble and crash that was the Asian crisis of 1997-1998. Since then, it has failed to make as much progress as it should have; it remains a middle-income country that is steadily losing mid-end manufacturing work in sectors such as electronics to China. The situation isn’t helped by the country’s poorly implemented positive discrimination policies in favour of the poorer majority Malays (at the expense of richer Chinese and Indian groups).

However, things in Malaysia could be about to improve. The electorate has become increasingly disgruntled with the Barisan Nasional coalition that has held power since independence, forcing the government to come up with some new ideas after several years of stagnation. New prime minister Najib Razak recently announced a number of measures to liberalise the financial sector, with the goal of growing the service-based economy; in particular, there is a long-standing aim to make Kuala Lumpur a key hub for the fast-growing Islamic finance industry. Closer co-operation with neighbour and long-time rival Singapore (which was briefly a part of Malaysia after independence) is a possibility and could benefit both countries.

There’s no guarantee that Malaysia will get back on track, but it makes for a potentially interesting turnaround story. Lyxor offers a tracker for the MSCI Malaysia index, which looks reasonably balanced; financials account for around 30% of the index, followed by industrials (20%), consumer staples (15%) and consumer discretionary (13%). The product is swap-based, pays dividends annually, and has a TER of 0.65%.

In the U.S., investors can focus on the country through the iShares MSCI Malaysia Index (NYSEArca: EWM).

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