Vietnam’s road to new market status

Can you respond to Hoang Huy Investment Services JSC (HOSE: HHS), which claims that FTSE made mistakes in its recent FTSE Vietnam Index Series Quarterly Review?

We are unable to comment on individual companies which have been included or excluded from our indexes.

FTSE Russell’s index reviews are based on data that is publicly available. Often, in Frontier and Secondary Emerging Markets, the quality and timeliness of data tends to improve as markets open up to international investors and index mandates grow in importance.

More broadly, FTSE Russell is always happy to receive market feedback on its review process. It should be noted that in order to ensure transparency and predictability, index reviews are conducted on shares that are in the index and may not include any recent share issues.

We understand that FTSE adds new stocks to its index according to its stated admission policy; however, local firms sometimes employ technical tactics to increase market capitalisation and liquidity to qualify for addition. Does FTSE have any exceptions to exclude such stocks?

In the past, we have amended index methodologies to reflect wider market developments or guidance from the local regulator. The most recent example of this is a new change to the FTSE Russell Free Float Restrictions. It allows for the exclusion of stocks subject to a high shareholding concentration warning notice from a regulator, to the effect that the company is in the hands of a limited number of shareholders. This rule resulted in the removal of a small number of Hong Kong and Chinese companies from FTSE global indexes.

Where there is suspicion around firms “employing technical tactics” to qualify for inclusion, FTSE Russell will report these issues to the local regulator. The issue itself and the regulator’s response can have a future bearing on the wider country’s classification in the FTSE Global Equity Index Series, as part of the required Quality of Market criteria.

Has FTSE included any stocks in the index that do not meet requirements, such as market capitalisation, liquidity, and turnover?

As part of the FTSE Vietnam Index Series quarterly review, all classes of ordinary shares in issue that have a full listing on the Ho Chi Minh Stock Exchange are eligible for inclusion in the FTSE Vietnam Index Series, subject to conforming to all other rules of eligibility. Following the application of three screens (Size, Liquidity, and Free Float), the remaining securities form the Index Universe. An additional foreign ownership availability screen is applied to the FTSE Vietnam Index.

FTSE Russell currently classifies Vietnam as a Frontier market. How possible is it for Vietnam to be upgraded to a Secondary Emerging market in the near future?

Vietnam is currently classified as a Frontier market, and there are four key Quality of Markets criteria that all Frontier markets must meet to reach Secondary Emerging market status: Custody (sufficient competition to ensure high quality custodian services), Brokerage (sufficient competition to ensure high quality broker services), Liquidity (sufficient broad market liquidity to support sizeable global investment), and Transaction costs (implicit and explicit costs to be reasonable and competitive).

Following the September meeting of the FTSE Russell Governance Board, promotion and demotion decisions and Watch List changes are formally communicated to the countries affected together with the rationale as evidenced by their scores on the Quality of Market matrix. Promotion, demotion, and Watch List decisions are subsequently published in a public notice along with the timetable for their implementation. If Vietnam were to be added to the Watch List in September 2016, it would remain on the Watch List for a minimum of one year, so the earliest it would be promoted would be September 2018.

Do you think our stock market is more attractive to investors after the foreign ownership threshold was removed last year?

As an index provider, we are unable to speculate on the attractiveness of the Vietnamese market after the foreign ownership limit is lifted. However, we expect international investors to welcome the improved access to the Vietnamese market, and that the weight of Vietnamese stocks in global indexes should increase as a result of this change.