|Market upgrade checklist still needs completed for Vietnam - illustration photo |
The domestic capital market has witnessed rapid expansion in recent years, with an average annual growth rate of 28.5 per cent between 2016 and 2021, making up for 134.5 per cent of GDP in 2021, representing a 3.5-fold increase compared to 2015.
Market players have been anticipating for years that the Vietnamese stock market would be elevated to the developing group by US global rating agency Morgan Stanley Capital International (MSCI) and FTSE. Specifically, Vietnam’s ultimate objective is to be included in the MSCI’s Emerging Markets Index, as reaffirmed by Prime Minister Pham Minh Chinh at last month’s Capital Market Forum.
Zafer Mustafaeglu, practice manager for Finance, Competitiveness & Innovation in East Asia & Pacific at the World Bank Group, believed that to be classified as an emerging market in the shortest time possible, it is vital for Vietnam to establish a stable basis on which the market may work successfully.
“The first crucial aspect is the institution, as it will formulate policies, promulgate regulations, and conduct monitoring,” Mustafaeglu said. “Second is infrastructure, with an efficient and secure transaction and payment system as the cornerstone for Vietnam’s equity market. Thirdly, the policy should make it easier for all legal, eligible businesses to raise cash from public funds. The lawmaker should also safeguard local and international investors from malpractice and fraud.”
Furthermore, Mustafaeglu added, intermediaries must be regulated and supervised extensively to ensure they conform to a set of ethics and are held accountable for any misconduct, while a more diverse range of financial instruments traded in the Vietnamese stock market should be welcomed in a bid to woo more overseas financiers.
Tran Khanh Hien, head of Research at VNDIRECT Securities, told VIR that a status lift in the MSCI Index is unlikely to happen this year due to the stringent requirements.
There are some elements that need to be improved drastically, according to Hien, such as lack of information disclosure in English and foreign ownership limits (FOL), among others.
“Nevertheless, the two most challenging obstacles hampering Vietnam’s market upgrade ambition are the absence of a pre-funding scheme and the long-awaited implementation of advanced tech from the Korean Exchange (KRX) into the Ho Chi Minh City bourse (HSX),” Hien added.
If a platform does not employ a pre-funding mechanism, investors might lose money or miss out on an opportunity, Hien elaborated. “Moreover, an insufficient technical infrastructure is a significant hindrance. Vietnam’s equity landscape could not grow with leaps and bounds without proper, smooth trading transactions”.
Meanwhile, Pham Luu Hung, deputy director of the Centre for Analysis and Investment Consulting at SSI Securities, said that thwarting the efforts to elevate the market’s standing is, first and foremost, the restriction on FOL.
“We would really welcome the expeditious adoption of a central counterparty clearing system in order to alleviate the pre-funding problem of Vietnam’s stock sector. There is currently no true delivery versus payment model in place in the local market,” Hung stated.
Meanwhile, non-voting depository receipts (NVDRs) have shown their significance as an efficient strategy for assisting the Thai stock market in attracting foreign capital. NVDRs and non-voting shares, Hung noted, could also assist Vietnamese-listed enterprises in raising cash from overseas investors.
But one of the most pressing concerns for international investors, including US financiers, is the lack of English-language information about Vietnam’s businesses, legislation, and stock market details.
“As a first step, all publicly-traded firms should be required to disclose their financial statements and other information in English, regardless of size,” said Hung.
The VN-Index is a market cap-weighted index of all 409 stocks listed on the HSX and is the most widely-quoted Vietnam stock market index in the international press. Most of Vietnam’s large-cap stocks are listed on HSX, while the Hanoi equivalent (HNX) was originally intended for smaller, high-growth Vietnamese companies. As a result, listing requirements on this exchange are less strict than for the HSX, and the daily trading up/down limit for stocks traded on the Hanoi exchange is +/-10 per cent versus +/-7 per cent for the HSX.
There are only two companies on the Hanoi exchange that have a market cap of above $1 billion, while all the top 20 companies on HSX have market caps of above $3 billion. The HSX and HNX are in the long process of being merged into the Vietnam Stock Exchange, and it is likely that Hanoi will eventually become the trading floor for derivatives and bonds in Vietnam. Several companies including ACB, SHB, and VCG have already migrated their listings from HNX to HSX in recent years.
The Unlisted Public Company Market, or UPCoM, was established in 2009 as an intermediary step for companies to transition to a formal listing on HSX or HNX, but it has also ended up being home to some fairly large companies. Source: VinaCapital