The key to the direction of the Vietnamese stock market: Inclusion in the FTSE!

The countdown to Vietnam's pursuit of inclusion in the emerging market index has begun, but there are still significant obstacles to overcome.

In the first stock market special meeting held in nearly 25 years, Vietnam's Prime Minister is striving to establish a global emerging stock market by 2025. At the end of this month, Vietnam's stock market will face a crucial test for inclusion in the FTSE Russell Emerging Market Index. Banks such as JPMorgan and HSBC HOLDINGS predict that Vietnam's stock market, with a total market value of $269 billion, will be "included in the index" later this year.

Chairman of the Vietnam Securities Commission, Wu Zhifang, stated that regulatory agencies are working hard to meet the inclusion criteria. Vietnam has previously stated its goal to increase the stock market's market value to 100% of the GDP by 2025 and to 120% by 2030.

JPMorgan predicts that once upgraded to an emerging market index, it will bring in approximately $500 million in passive fund inflows.

Investors are preparing for this change, with Vietnam's benchmark Ho Chi Minh Index rising by over 10% this year, but foreign capital has been selling off, with a net outflow of $23 million.

Pursuing the Emerging Market Dream

Vietnam is striving to realize its dream of being granted entry into the ranks of emerging markets. This ambition can be traced back to 2018 when the global index compiler FTSE Russell included Vietnam on its watchlist for emerging markets.

On one hand, Vietnam does have many favorable conditions for being granted emerging market status: it has a leading economic growth rate in Southeast Asia, is recognized as a global manufacturing hub, and its stock market has seen double-digit growth in three out of the past five years.

With the potential to achieve GDP growth of over 6% in the next 3 to 5 years, coupled with stable macroeconomic and political conditions, Vietnam does indeed have an advantage over some other economies in the region.

The next FTSE Russell review will take place on March 27th, but the index compiler typically announces changes in September. Vietnam has been on the watchlist for frontier markets since 2018.

Reality is Far More Challenging Than the Dream

However, reality is far more challenging than the dream, as Vietnam's five-year journey towards its dream still faces significant obstacles. Institutions like FTSE Russell have identified two major issues: pre-trade capital requirements and restrictions on foreign ownership percentages.

Currently, Vietnam requires foreign investors to have full capital in the country before trading, which not only creates operational inconvenience but also goes against the principle of free capital movement.

The total foreign ownership limit in listed Vietnamese banks is 30%, and for some high market value companies, it cannot exceed 49%, restricting the free entry of foreign capital.

Ruchir Desai, a manager at an Asian frontier capital fund, stated that for FTSE Russell's upgrade, Vietnam essentially needs to eliminate the requirement of using cash deposited in the country to invest, which is crucial. FTSE Russell stated in September last year that progress was slower than expected, and Vietnam's practice of ensuring funds are in place before placing orders did not meet settlement standards.

There are also issues with the process of opening new accounts. Vietnam is piloting a trading system to address deposit issues and shorten settlement cycles, but it has not been officially launched yet.

Furthermore, even if Vietnam is eventually approved to join the ranks of emerging markets, it may still face risks in the future. The Pakistani stock market is a case in point, as it was downgraded to a frontier market just four years after being included.