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Vietnam stock market mired by being insular

MSCI notes that the Vietnamese equity market is significantly impacted by issues concerning access to foreign investors, as well as equal rights to foreign investors.

Frontier markets like Vietnam are much smaller in size, volatile and less efficient, with companies that are often under- researched and could be mispriced.

VIETNAM, the best performing stock market in South-east Asia, is not as yet officially recognised as an emerging market by the global index agency, Morgan Stanley Capital International (MSCI). The non-recognition denotes the country's unpreparedness, and deters many large funds from investing.

Vietnam's current status on the Frontier Market Index is expected to remain in place till late 2019 or 2020. One of the principal sticking points is that Vietnamese regulations cap foreign ownership at 25 per cent in many cases, as well as unresolved technical issues. Local retail investors currently dominate stock trading in the country.

The relative underdevelopment of frontier markets - some call them "emerging emerging markets" - has meant that it is the developed and emerging markets that draw most of the attention of foreign investors.

MSCI noted in its latest review this month that the Vietnamese equity market is significantly impacted by issues concerning access to foreign investors, as well as "equal rights to foreign investors" as some company-related information is not always readily available in English.

The rights of foreign investors, moreover, "are limited as a result of the stringent foreign ownership limits imposed on both total as well as individual foreign investors". It notes that foreign exchange liberalisation is limited as "there is no offshore currency market, and there are constraints on the onshore currency market".

At the top of the Vietnamese reform agenda is lifting the cap on foreign investors. Of the 376 companies listed on the country's main bourse, the Ho Chi Minh City Stock Exchange (HoSE), only 25 have no restriction on foreign ownership, three limit foreign ownership ranging from 51 per cent to 70 per cent, 23 have caps of less than 51 per cent, 317 are capped at 49 per cent, and eight at 30 per cent.

Vietnamese companies are typically reluctant to lift foreign ownership limit to 100 per cent due to complicated accounting, reporting and transparency procedures. Moreover, companies with 51 per cent foreign holding would be considered foreign-invested companies, and would face restrictions for operating in sensitive sectors such as defence, telecommunications and insurance. Moreover, Vietnamese companies prefer to retain majority voting rights for domestic investors.

Yet, many Vietnamese companies worry that although graduation to emerging market status would bring in much more portfolio funds, it would expose the market to new risks of sudden inflows and flight of capital which would make the market volatile.

The buoyant domestic economy has fuelled a massive expansion of the bourses, with Vietnam surging ahead to become South-east Asia's best performing market this year. The benchmark VN Index registered a 12 per cent gain on the HoSE this year after falling 9.3 per cent in 2018. It has been the third-ranked market worldwide over the last five years.

MSCI has acknowledged the country's reforms in its review in January this year, such as the plan to set up the Vietnam Stock Exchange (VSE), which would own both the Ho Chi Minh and Hanoi Stock Exchanges, alongside liberalising access to foreigners.

In May this year, foreign investors bought Vietnamese shares worth 23.5 trillion dong (S$1.37 billion), and sold shares worth 19.5 trillion dong. Foreign investors were net buyers with 4.01 trillion dong worth. For the ninth consecutive month since last September, foreign investors were net purchasers, worth a cumulative 21.2 trillion dong.

By no means are frontier markets basket cases because they offer gems such as the Vingroup, Bao Viet Holdings, Petrolimex and Vietnam Airlines. The big story was the purchase by the South Korean conglomerate, SK Group, of a 6.1 per cent stake of Vietnam's largest privately-run Vingroup for US$1 billion in May this year.

Yet, frontier markets such as Nigeria, Vietnam and Argentina are hallmarked by low liquidity and a high degree of political risk. Frontier markets are found in countries that are experiencing higher economic growth than both the emerging and developed ones.

But frontier markets are much smaller in size, are volatile in many cases and obviously less efficient. Their companies are often under- researched and they could be mispriced. These caveats do not take anything away from the tremendous opportunities on offer for high growth - provided that investors make an effort to research the companies properly.

Frontier markets are often lacking in liquidity compared to developed and emerging markets. Here again, the lack of capital flows and pricing inefficiencies often opens up profitable opportunities for investors.

For frontier markets, investment planners tend to recommend the long haul and a higher ability for risk spread across a wide portfolio. But many investors prefer to avoid such uncertainties. Once Vietnam graduates to emerging market status, the negative perceptions may change.

Meanwhile, Vietnamese market regulators are planning to woo foreign investors through Non-Voting Depository Receipts (NVDRs), which would enable them to buy shares in Vietnamese companies without getting voting power. According to the Stock Exchange of Thailand, the proposed NVDRs are aimed at foreign investors who are interested in investing in a company but are prevented from doing so because of foreign ownership restrictions.

The extraordinarily surprising returns of the Vietnamese bourses have come from a low base underlined by good growth potential. The World Bank has praised Vietnam as one of Asia's fastest-growing economies with a 6.6 per cent gross domestic product growth rate forecast for this year. The country reminds many investors of a mini-China hurtling towards its targets.

To cite two innovations, the Vietnamese market authorities have announced the beginning of trading in government bond future contracts next month. The HoSE also plans to start trading in covered warrants on June 28, the State Securities Commission has announced. The covered warrants are expected to diversify investment products on the stock market, offer tools to reduce risks for investors and encourage foreign investment inflows.

At the same time, the Vietnamese government realises the need to divest its stake partially in many state-owned enterprises that are expected to lead the way in attracting foreign investors.

Along with reviewing and liberalising a slew of laws and regulations covering the stock market, the market authorities are plugging the gaps identified by the MSCI as part of its guided reform process.

With its reasonably good track record, Vietnam is close to meeting the requirements of an MSCI upgrade to emerging market status.

  • The writer is editor-in-chief of The Calcutta Journal of Global Affairs