Despite some political noise around the world, overseas investors have not lost their enthusiasm for Asia’s frontier markets, reflected in the amount of money they continue to pour into Vietnamese stocks amid an improving growth outlook for the country. 

Vietnam and its investors may have been disappointed this year, when the New York-based Morgan Stanley Capital International (MSCI), a leading provider of investment decision support tools worldwide, did not reclassify the country as an emerging market; a title that could help its stock market attract more capital inflows than its current frontier market designation brings. 

Speculative economy

“Modest” is how Chairman of Saigon Securities Incorporation (SSI) Mr. Nguyen Duy Hung recalls the initial stages of the local stock market as the country prepared to join the World Trade Organization (WTO) in 2007. 

“When a large amount of money poured into the stock market with only a few listed companies, there was turmoil,” he told VET. 

“Everyone thought that raising money or making money was easy, so many businesses assumed that a stock issuance would automatically bring in a lot of funds without any effort needed in either enhancing management capacity nor allocating investments effectively.”

Over the course of the last decade, Vietnam has experienced many of the fluctuations a frontier market will go through on the path towards emerging market status. 

In 2008, the country embarked upon a huge credit-fueled economic and stock market bubble that led an inevitable burst. 

By 2011, most people had given up on Vietnam’s recovery, with the economy suffering from double digit inflation, a moribund banking system, and a real estate market in freefall. The structural reforms the government initiated then began to bear fruit. 

Vietnam’s GDP grew 6.2 per cent in 2016 and 6.7 per cent this year is well within the realms of possibility, with high growth largely expected to continue into the future. 

But despite such growth, a high debt-to-GDP ratio of 62 per cent and a current account deficit has given some investors pause. 

The government limits how much outside money can be part of any one company, and the stock market is still relatively undeveloped compared with other countries in the region. 

Foreign direct investment (FDI) could add liquidity and depth to the stock market and local enterprises, but only recently has the government indicated that it would be willing to let outside money come in.

In January, Prime Minister Nguyen Xuan Phuc said in an interview with foreign media that he wanted to make Vietnam one of the top four investor-friendly economies in Southeast Asia. 

His comments followed an earlier statement that he would be opening up more of the country’s industry to FDI. The statements were quickly hailed by those who have been eyeing Vietnam’s positive demographics and growing economy.

The test case many hoped for came in September 2016, when Vinamilk became a core part of the MSCI Vietnam Index. 

The company now represents more than half of the benchmark for Vietnam’s stock market, and its success led to a flurry of initial public offerings (IPOs) on the Ho Chi Minh Stock Exchange (HoSE). 

This year, the government went further on liberalization, inviting foreign investors to bid for its stakes in the Saigon Alcohol Beer and Beverage (Sabeco), which has a market cap of $9 billion, with the first round of divestment taking place in December.

No upgrade possible before 2020

Analysts at the Montreal-based Pavilion Financial Corp., a diversified global investment services firm, argue that Vietnam’s stock market is the best way to play the country’s growth story, noting that Vietnamese stocks had outperformed regional peers and other export-oriented economies up to 2016. 

The long wait continues, however, as MSCI’s latest review in June once again excluded the country from its list of potential upgrades, while Pakistan, with no difference in liquidity and credit concerns compared to Vietnam, moved on to emerging market status.

The disappointment comes when Vietnam has been one of the best performers in Asia this year, with the VN-Index rising 25 per cent year-to-date at the close of trade on November 24. 

Foreign traders net purchased $1.42 billion worth of securities in the first ten months of the year, up nearly 80 per cent from a year earlier, while their securities portfolios expanded 36 per cent year-to-date, the highest recorded so far, according to a report from the National Financial Supervisory Commission (NFSC). 

Theoretically, Vietnam is eligible for an upgrade. Out of the 14 stocks currently listed in the MSCI Vietnam Index, 13 have already helped Vietnam meet the capitalization requirement of $1.375 trillion for emerging market status. 

Liquidity is also doing well, with MSCI’s methodologies showing that the 12-month liquidity level for Vietnam is already 15 per cent higher than the emerging market threshold. Frequency of trading, which is the proportion of trading days where a stock trades at least once during the day, has also surpassed 80 per cent.

The main problem, however, comes from the amount of free-floating shares in Vietnam, with the number of Vietnamese shares available to external investors only making up to around 20 per cent of the entire market, Head of ASEAN Index Coverage at MSCI, Mr. Valentin Laiseca, told VET. Only four stocks in the MSCI Vietnam Index meet the free-float requirement of $687 million, and they are too close to MSCI’s minimum requirement, with Mr. Laiseca saying this might be a potential threat. 

“We need more time to confirm that the free-float level is irrevocable, which means that in the future, Vietnamese companies won’t suddenly slash the number of shares available to outside investors,” he explained. 

Other issues include the lack of information in English, as well as the absence of an offshore currency market for the Vietnam dong. The market classifier is also concerned that a commercial lender in Vietnam acts as the settlement agent for securities trading, not the State Bank of Vietnam (SBV). 

“We are closely monitoring new regulations in Vietnam,” he said, adding that if the country gets placed under review in the June 2018 cycle, MSCI will then seek input from international investors for at least a year before implementing the decision. This means Vietnam can become an emerging market in 2020 at the earliest.

Emerging means opportunity

Still, officials are optimistic about the huge potential inflows waiting from emerging market funds when Vietnam’s status becomes emerging. 

“The size of investment funds and the influx of foreign capital into the market will improve, with new products becoming new channels to attract capital,” Director of International Cooperation Department at the State Securities Commission (SSC), Mr. Vu Chi Dung, told VET. 

“Right now, the SSC has received positive feedback from MSCI in terms of policy improvements and the expansion of market size and liquidity. This shows that Vietnam’s reform efforts are on the right track.”

HoSE Deputy CEO Ms. Tran Anh Dao told VET that Vietnam has already made great strides forward since the start of the year. “HoSE has welcomed 27 new companies in 2017, including major names such as Vietjet Air, VPBank, and Vincom Retail,” she said. 

“Seventeen firms on HoSE have already scrapped their foreign ownership limit, including three with over 60 per cent of shares owned by overseas investors. About 20 out of the 30 largest companies on HoSE have pledged to disclose timely information in English, while the number of new accounts opened by foreigners has increased 17 per cent this year with 40 per cent of institutional accounts remaining active.” 

Now that the government no longer directly mobilizes and allocates resources but instead directs companies via policies, SSI’s Mr. Hung attributed this as being the new driving force of the second phase of the capital market’s development in Vietnam. 

“The biggest achievements we can see till now have been the equitization of SOEs and the IPO plans of large SOEs,” he said, citing a number of high-profile cases that his brokerage firm has been advising on, including the likes of Vinamilk and Vincom Retail. 

With macroeconomic indicators being evaluated positively, Mr. Hung said Vietnam is in a great position to attract further foreign capital. 

“These positive outcomes are not just immediate effects; it is the long-term confidence of investors in Vietnam’s economic growth potential,” he said. 

When asked about the profits SSI and other brokerage firms in Vietnam may see when the market is upgraded, he replied “it is really hard to speak about profits when uncertainties remain.” 

However, “the upgrade would definitely mark another milestone for the local stock market, and we all know that emerging means opportunity.”

VN Economic Times