Vietnam inching towards MSCI emerging market index status

Matthew Smith, head of Research at Yuanta Securities

In the next few months, Kuwait will likely be upgraded to emerging market status. How can Vietnam benefit from this move?

Vietnam should see some inflows as a result of this reshuffling given that its weighting in the frontier markets index should increase from the current 17 per cent to around 25 per cent. Unfortunately, fund assets under management (AUMs) in global frontier markets have seen substantial declines in recent years, dropping by about 40 per cent in the period of 2018-2019 to around $13 billion at the end of last year.

I suspect that this trend has continued in 2020, so it’s probably around $11 billion in total AUMs, of which perhaps $8 billion are passive funds and the rest are active funds.

If Vietnam’s weighting in the index is raised by 8 percentage points, we should see $640 million in inflows into Vietnam stocks from the passive funds and perhaps as much as $960 million if the active funds also increase their weightings at the same pace.

I reckon it will probably be closer to the lower estimate however, because active funds don’t actually have to benchmark themselves to the index exactly. So it’s not a game-changer for Vietnam, in my view.

Which tickers/companies could be the biggest beneficiaries and why?

The stocks that will benefit are the MSCI Vietnam index components. The key names are all large caps that have foreign ownership limit (FOL) room.

For example, Vingroup (VIC), Vinamilk (VNM), and VinHomes (VHM) all have about 3 per cent weightings in the MSCI now and these weightings will all rise once Kuwait is no longer in the index. Unfortunately, full-FOL shares won’t see any direct inflows because they are not included in the MSCI’s index.

What must Vietnam do in order to be upgraded to emerging market status and when, realistically, could this happen?

The legal reforms might enable the use of non-voting depository receipts (NVDRs), and this is positive in my view. Still, it’s going to take time to finalise the legal structure and put NVDRs into practice. I am optimistic that this will happen and that NVDRs are sufficient for the index providers to upgrade Vietnam to their emerging markets category.

Still, it will take time to put all this into practice and MSCI will require a period of observation of how the system actually works in practice. Realistically, I don’t see the actual upgrade coming through until 2023 or 2024.

How might overseas investors and funds pour cash into the Vietnamese market in the near future?

I think the outlook for foreign direct investment is still far better than that of portfolio inflows in the second half of this year, but there is room for optimism. One is the index weighting change discussed earlier.

Also, in my opinion the US dollar could be poised for a period of continued weakness, which has typically tended to benefit emerging markets in the past. But the global outlook is highly uncertain so I wouldn’t expect much change in the recent trend of foreign net selling over the next couple of months.

However, I think the outlook for 2021 is much better given the sharp macro-economic recovery that I think Vietnam will see next year, along with the expected re-start of various infrastructure and property development projects and potentially a resurgence of initial public offerings.