Financial innovations open markets

Liberalisations in the financial system – such as raised foreign ownership limits – will attract capital and promote growth-Photo: Le Toan

Innovations allow businesses to be more effective and efficient, operate with improved productivity, and make further economic developments more robust and certain. Businesses, for example, have gained tremendous productivity from implementing innovations related to the development of the internet. Innovations, therefore, are a cornerstone of any economy. And for a developing economy, a vastly more important cornerstone. Fundamentally, innovations often lead to other related innovations which can profoundly alter policy, laws, and regulation. From this perspective, the implementation of innovations must be considered carefully.

Innovations related to foreign investment and regulations concerning the stock markets are vital to the development of the Vietnamese economy.

As the stock markets in Vietnam provide a quarter of the capital supply in the country, according to Minister of Finance Dinh Tien Dung, the future of these markets will play an essential role in the future of the economy. It is imperative that these stock market developments remain dynamic and fluid – all implementations of innovations require flexibility.

In the past, Vietnam has been progressive in its implementation of policies aimed at attracting both direct and indirect foreign investment. Considerable effort has been made to pattern the laws and regulations with the developing economy and thereby provide a framework for the implementation of future innovations.

Vietnam is in an enviable position from a foreign investment standpoint. If Vietnam continues to implement innovations relative to foreign investment, it can and will continue to attract foreign investment.

Central to this consideration of innovation for foreign investment in the stock market in Vietnam in 2017 is the further implementation of the lifting of the foreign ownership limits. Raising the foreign ownership limits on listed firms is an innovation which promotes the goal of the government to transition from a frontier market to an emerging market. Access, liquidity, and foreign ownership play critical roles in determining the status of a country. As Vietnam continues to work toward this goal, adjustments to regulations and laws promoting more transparency, ease of investment, and capital flow requirements will move Vietnam in the right direction.

Sometimes the expectancy of innovation gets ahead of the actual innovation. As interest in an innovation develops, anticipation increases and speculators begin to formulate the effects of the innovation. Often, the expectations do not directly or accurately meet the effect of the innovation. Certainly this has happened with the increase in foreign ownership limits of listed securities in Vietnam.

Much anticipation has formed over the raising of the foreign ownership limits for listed securities over the last few years. In fact, the anticipation has been so considerable that it has increased certain stock prices beyond reasonable levels. Domestic and foreign investors speculated on firms expected to raise the foreign ownership limits first. The government telegraphed its intentions to the market concerning the innovation. Consequently, many listed firms experienced higher interest based on the pretence of a higher foreign ownership limit.

Subsequently, as these firms have implemented the raising of the foreign ownership limit, many of the prices of these firms have moderated. Investors “bought on the rumour, sold on the news” and interest in the foreign ownership limit change has become of little investor interest.

It is not uncommon that anticipation of a major change or alteration in policy related to investment in the stock market would bid prices of securities higher. Over time, the anticipation can significantly outpace the effect of the change. As a result, when the change is implemented, a realisation of the effect of the change normalises the prices of the securities.

An example of this can be seen with the stock market rally that occurred after the last presidential election in the US. After the election, the markets rallied strongly through the end of the year on the promise of a Trump presidency. Thoughts of tax cuts and infrastructure spending propelled the market rally. But it remains to be seen if either policy change will actually take place, or how the markets will react to their actual implementations. Most experts expect a moderated effect on the stock market in that event.

Investors are making a mistake by not considering the importance of the implementation of this innovation. The raising of the foreign ownership limit for listed securities might be considered one of the most important innovations implemented since the creation of the stock market system in Vietnam. It is so important simply because it propels Vietnam to a country status that will attract more substantial capital from foreign sources.

The future development of emerging market status will essentially open the markets in Vietnam to a whole new group of international investors which are substantial in size, whereas Vietnam is now limited to foreign ownership by those international investors willing to invest in frontier markets. This increased interest would mean that the stock markets and economy would continue to increase in valuation.

Investors should never underestimate dramatic innovations such as the increase in the foreign investment limits. Such innovations may take time to develop, to be implemented in scale, but such innovations can meaningfully affect the markets and the future of the country.

As foreign capital into Vietnam continues to stream in, foreign investment will provide needed sources of capital for corporate expansion and economic growth. This economic growth will be considerable and stock prices will reflect the greater economic growth.

Innovation brings prosperity at all levels, for all participants. The synergy between economic growth, foreign investment, and stock price valuations is well documented and proves the need for innovations to encourage foreign investment for greater economic growth. And development of an economy depends not only on flexibility in laws and regulations, but also on innovation. Without innovation, productivity suffers and the economy will suffer.

First and foremost, commitment to foreign investment requires the implementation of innovations such as the increased foreign investment limit. It alerts foreign investors to the seriousness of the Vietnamese government to continue to alter policies to attract and protect foreign investment.

Such innovations as lifting the foreign ownership limit provide a clearer, more certain path for foreign investors and therefore heighten foreign investment interest. Whether the innovations are legal or regulatory or simply technologically-driven, all innovations promoting greater transparency, ease of investment, and a more solid and sound foundation will benefit all investors and the market as a whole. And as Vietnam continues to develop as a formidable foreign investment destination, innovations will provide added incentives for foreign investors. Innovations will continue to set Vietnam apart from other countries attracting foreign investment.

The future of the financial markets in Vietnam will be defined by the innovations which are implemented to attract foreign investment. As Vietnam continues to develop innovations catering to the need for transparency and ease of investment, more substantial foreign investment will be assured. The lifting of the foreign investment limit is one major innovation leading to this future.

By Dr. Christian Kamm - President of Kamm Investment Inc, a US-backed investment firm in Ho Chi Minh City