Foreign investors will likely put between $5 billion and $8 billion into Vietnamese securities if the local stock market is elevated to an emerging one from its current frontier status, a VinaCapital executive has said.
The figures correspond to 0.7-1.2% of the emerging market indexes managed by MSCI and FTSE Russell, said Dang Hong Quang, director of the Hanoi representative office of VinaCapital, one of the leading fund managers in Vietnam, at a conference held by The Investor in Hanoi on Tuesday.
An upgrade would also help deepen the stock market by attracting highly stable foreign inflows as retail investors now account for more than 90% of traders, Quang added.
The executive noted that the upgrade would also help lure pension funds that are shifting away from Chinese markets due to heightened U.S.-China tensions and large institutional investors that are seeking potential alternative destinations.
Quang noted that Vietnam has outsized other peers that are included in emerging market indexes in terms of market capitalization and liquidity. Companies listed on the Ho Chi Minh Stock Exchange (HoSE) had a combined market cap of $190 billion as of end-September, larger than the Philippines, Qatar and Kuwait and approaching Malaysia. In addition, daily transaction values are only behind Indonesia in the ASEAN bloc.
“In terms of GDP and stock market size, Vietnam totally deserves to be classified among emerging markets,” Quang stressed.
Steve Brown, head of institutional sales at VPS Securities, forecast transaction volumes to double or jump five-fold if Vietnam’s stock market is upgraded to an MSCI Emerging Market. Foreign inflows would rise an estimated $1-5 billion a year.
Hurdles to upgrade
The VinaCapital executive pointed out two main criteria that the Vietnamese stock market needs to meet to be upgraded – foreign ownership limit (FOL) and prefunding.
As per the FOL, under current legislation, foreign investors are not allowed to invest in 25 business lines and have limited access to 59 others. VinaCapital suggested cutting short that list.
In addition, the introduction of Non-Voting Depositary Receipt (NVDR) would help overseas players invest in companies that have reached their FOL ceilings.
Regarding the prefunding issue, the KRX system, a trading platform provided by the Korea Exchange for the HoSE, is scheduled to go live in December this year. Once the KRX system becomes operational, securities companies will work with other parties to solve the issue of having foreign investors deposit 100% of the money to purchase shares.
In the longer term, the Central Counterparty Clearing House (CCP) will technically clear the prefunding requirement, Quang said.
Speaking at the event, Can Van Luc, chief economist at state-controlled BIDV bank, cited a survey as saying that just 2% of investors worldwide do not fulfil their payment obligations in stock trading.
To solve the prefunding problem, Luc put forward three measures. They are upgrading the information technology system; implementing fines for violating investors; and authorizing securities companies to measure the risks themselves and decide whether to request their clients to deposit in advance.
Policy actions
Phan Duc Hieu, a permanent member of the National Assembly’s Economic Committee, urged the Ministry of Finance and the State Securities Commission (SSC), the stock market watchdog, to form an action plan to facilitate the status upgrade soon.
He proposed three levels of policy actions. First, the Vietnamese government needs to make legal adjustments regarding the clearing mechanism and the portfolio that is subject to FOL.
Second, the government should make full use of the current legal corridor while awaiting amendments. For example, authorities need to regularly update information on the FOL-restricted portfolio and make it more accessible. In addition, listed companies should be required to announce the FOL themselves instead of it being optional.
Third, as a bottom-to-top approach, listed companies should be more active in disclosing information that can impact investors beyond what they are required to do. In this regard, the SSC should take the initiative.