The benchmark VN Index, Southeast Asia's best performer this year, has risen 23 percent year-to-date, compared with a 6 percent decline in the MSCI Emerging Markets Index over the same period.— File Photo

by Ansuya Hariani, CNBC Asia

Vietnam equities have outperformed their emerging market peers by a wide margin this year, and with the nation getting its economic house in order, this trend is expected to continue into 2014.

"At a time when the fundamentals in Indonesia and Thailand are deteriorating, Vietnam's are turning brighter. We expect the market to outperform its regional peers in 2014," Sean Darby, chief global equity strategist at Jeffries wrote in a recent report.

The benchmark VN Index, Southeast Asia's best performer this year, has risen 23 percent year-to-date, compared with a 6 percent decline in the MSCI Emerging Markets Index over the same period.

Darby notes that the economy's "Achilles heel", its trade deficit, is improving, while foreign direct investment (FDI) remains healthy.

FDI reached $9.6 billion for the first ten months of the year, with 70 percent of investment going into the manufacturing sector. A stable local currency combined with competitive labor costs are set to help further boost investment into the country, say experts.

"Vietnam is enjoying stable growth with lower inflation helped by an increase in manufacturing contribution from foreign owned firms," Darby said, highlighting the contrast with India and Indonesia which are seeing slower growth and rising inflation.

Vietnam's economy is forecast to grow at around 5.5 percent in 2014 with inflation running a little higher at over 6 percent. The country's gross domestic product grew 5.42 percent this year, compared with 5.25 percent in 2012.

"This is probably 'the optimum' speed for economic growth and if the inflation rate cools further there may be some room for rates to fall," he said.

On top of an improving economic outlook, the government is also taking action to clean up bad loans in the banking system.

In October, state-owned asset management company Vietnam Asset Management Company (VAMC) announced it would be acquiring $118 million of bad debt from Vietnam Bank for Agriculture & Rural Development, the country's largest lender by assets.

Agribank had a bad-debt ratio of 6.1 percent as of June 2012, according to the State Bank of Vietnam - the country's central bank. Lenders with bad debt ratios of 3 percent or more will be required to sell non-performing loans to VAMC, according to a government statement in May.

Andreas Karall, chief investment officer of Asia Frontier Capital (Vietnam) - an investment management firm that runs a fund focusing on small to medium high growth companies in Vietnam - says he sees "enormous upside potential" in the new business cycle that has started in the country and is expected to last up to seven years.

In addition, he notes that the market offers attractive value with around one third of the over 700 listed Vietnamese stocks trading at a price to earnings ratio of between 6 and 7.

"Many of them have a dividend yield of more than 9 percent, and there are even some companies whose net cash position is almost as high as their market [capitalization]," Karall said in a press release announcing the launch of AFC Vietnam Fund earlier this month. — CNBC