Vietnam makes 'notable progress' in meeting FTSE's market status upgrade criteria: HSBC

Vietnam has made notable progress in meeting the requirements of FTSE to have its stock market status upgraded from "frontier" to "secondary emerging", say HSBC analysts.

The analysts said the country has met seven out of the nine criteria required for promotion to FTSE indices. FTSE will consider upgrading in its review on October 7.

"We think developments on the two other issues outstanding – the Securities Law and the launch of the KRX trading system – bring Vietnam closer to an upgrade," the analysts wrote in a new report named " The Flying Dutchman - Vietnam’s changing frontier".

"While we are also in the optimists’ camp, we note that FTSE also consults investors and brokers when arriving at a final decision," they added.

FTSE divides its emerging markets into advanced and secondary emerging markets. Vietnam is on the watchlist for an upgrade to secondary emerging markets.

Foreign ownership limits

The HSBC analysts, however, noted that foreign ownership limits (FOL) remain a concern.

It is not an explicit requirement, but FTSE consults with investors who might argue that FOL limits market access, they stressed.

Currently, only 12 Vietnamese stocks have exhausted their FOL limits. On average, the VNIndex has an FOL of 42%; and current foreign holdings are only 17%.

One issue FTSE has highlighted is the complicated registration process for foreign investors. In addition, there are FOLs in certain industries such as banking, aviation, and telecoms. They are typically up to 50%, but the limit of foreign ownership in commercial banks stands at 30%.

This means that when foreigners have bought 50% of a company’s shares they can only trade with other foreigners. A foreign price will be established, which differs from prices for local investors. While this may not be a strict requirement for FTSE for re-classification, it might be an issue raised by investors, according to the analysts.

Impact of an upgrade on material fund inflows

Despite U.S. tariffs, Vietnam’s stock market is up 40% year-to-date, making it one of the best performers in the world.

If FTSE were to confirm an upgrade, it would probably take at least another six months before the market classification is changed.

An upgrade means Vietnam would automatically be included in indices like FTSE All-World, FTSE EM, and FTSE Asia. Passive funds benchmarked to these indices will have to buy Vietnam equities or ETFs. Active funds have the discretion to do so.

HSBC's analysis shows that a large portion of Asian and Emerging Market active funds already hold Vietnamese equities (38% of Asia funds and 30% of Global Emerging Markets or GEM funds). The Asia funds already own on average 0.5% in Vietnam.

The bank analysts estimate an upgrade might lead to inflows of $3.4 billion. They assessed that the amount of actual flows would likely be smaller and staggered over time. $1.5 billion of inflows would come from passive funds once inclusion is completed.

"Based on our most optimist scenario, reclassification by FTSE could bring a maximum of $10.4 billion into Vietnamese equities," they wrote.

Vietnam’s outperformance this year has been eye-catching, especially when compared to the more moderate rise in other markets around the time they were upgraded to emerging market status by FTSE (e.g. Saudi Arabia and Kuwait).

"In our view, this suggests further upside after an FTSE upgrade might be limited. An additional risk to consider is the possibility that existing investors might sell on the news to take advantage of the recent bounce."

Progress Vietnam has made, according to HSBC.

For a market to be upgraded to emerging market status, it must meet various criteria laid out in FTSE’s Quality of Markets framework. Vietnam already meets the quantitative criteria, such as the presence of large stocks, trading volumes, and the size of the market. The country is still classified as a frontier market because of qualitative limitations.

For example, FTSE noted in the past that Vietnam failed to meet the “Settlement Cycle (DvP)” and “Settlement – costs associated with failed trades” criteria. At the time, FTSE rated them as ‘Restricted’, a partial failure. The issue is that Vietnam conducts a pre-trading check to ensure the availability of funds prior to the execution of a trade. This makes trading and settlement an onerous process.

In its latest update, FTSE acknowledged that Vietnam now meets seven out of the nine criteria required. Notable progress has been made on the two pending requirements and, this strengthens Vietnam’s case for reclassification. For example:

◆ The relaxation of pre-funding requirements to purchase stocks. This was changed in September 2024 when the Securities Law was amended; this included the need for market information disclosures to be available in English.

◆ Vietnam launched the much-awaited KRX trading system in May this year. This was a pivotal moment for the exchange. The new system overcomes issues such as order congestion and has the capacity to handle high trading volumes.

◆ More importantly, this system paves the way for the exchange to transition to a central counterparty clearing system in which trading and settlement is simultaneous and more efficient.