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[HANOI] Foreign investors' infatuation with Vietnam is waning.
After pumping in US$3.4 billion since 2006, overseas traders are set to be net sellers of assets traded on Ho Chi Minh City Stock Exchange this year for the first time in a decade, according to data compiled by Bloomberg.
While the benchmark VN Index is near an eight-year high, MSCI Inc hasn't yet elevated the market to emerging status from frontier and government plans to remove foreign ownership limits have been enacted at just a few companies.
"The root cause is really the market access," said Lai Yeu Huan, a Singapore-based senior fund manager at Nikko Asset Management Ltd, which has 10 per cent allocated to Vietnam equities in a South-east Asian fund it set up in November, and doesn't plan to add to those holdings.
"That triggers the low level of liquidity." Ten years after the International Monetary Fund touted Vietnam as an "emerging China," the nation's US$71.3 billion equity market remains one of the region's smallest and an overhaul of the state-dominated banking system has stalled.
The average daily value of shares changing hands on the Ho Chi Minh City Stock Exchange in 2016 is about US$106 million, less than a quarter of the turnover in Malaysia or Indonesia, according to data compiled by Bloomberg.
All of MSCI's criteria for emerging-market classification are expected to be met as soon as the end of 2016, Nguyen Son, head of market development at the State Securities Commission, said in an interview in Hanoi in April.
Still, the index compiler didn't put the country on its watch list for emerging- market inclusion in June.
Overseas investors offloaded US$106 million in Vietnamese investments this year, after being net buyers since the exchange began compiling such data in 2006.
"Foreign investors are very positive on Vietnam, but lagging bank reforms and limited liquidity keep money sidelined," said Patrick Mitchell, Ho Chi Minh City-based director of institutional marketing at Maybank Kim Eng Securities Ltd, which met with about 30 foreign institutional investors already in Vietnam or keen to learn about the country's economic potential on a recent marketing trip to Singapore and Kuala Lumpur.
The VN Index has increased 16 per cent this year, versus an 8.7 per cent gain for the MSCI Frontier Emerging Markets Index.
Of the 309 stocks listed in Ho Chi Minh City, less than 20 have an average daily trading value of between US$2 million and US$5 million, data compiled by Bloomberg shows.
"The ability to buy and sell without causing unusual price movements is very important," said James Lau, a Kuala Lumpur-based investment director at Pheim Asset Management Sdn, who has invested in Vietnam.
"It is difficult to state a threshold, but certainly being able to trade $2 million to $3 million worth of a single stock a day would be useful particularly for key stocks."
Vietnam Dairy Product JSC, the country's biggest company by market value, in July received approval to remove its 49 per cent foreign ownership limit.
The nation also plans to merge its two stock exchanges and start a derivatives market next year to offer investors a diversify of trading tools.
Policy makers set up an asset-management company to purchase soured loans from banks, though only 15 per cent of the debt it has purchased has been resolved.
Mark Mobius, the 80-year-old executive chairman of Templeton Emerging Markets Group, is upbeat about the progress.
"The government is making some real good reforms, and we think that at the end of the day they will expand the market," Mr Mobius said in an interview on a recent visit to Tokyo.
"The market is not very liquid, but that market will be expanding with more privatisations. So I would say that's the most exciting."
James Bannan, which runs the US$212 million Frontier Markets Fund at Coeli Asset Management SA in Sweden, says Vietnam is "one of the largest country exposures" in the portfolio. Mr Bannan says he is "constantly adding money," given the prospect for economic expansion.
The government is targeting growth of 6.7 per cent this year.
Other investors say there's more to be done. Vietnam needs to speed up share sales in some big state-owned enterprises as well as divestment in large companies, said Ho Chi Minh City-based Alan Pham, chief economist at VinaCapital Group, the country's largest fund manager.
"Foreign investors are usually huge," Mr Pham said. "They don't see enough stocks in this market to invest in."