The narrative at the beginning of 2023 centred around the global capital’s exit from various markets, primarily instigated by rising interest rates in the US and other associated risks. However, the current landscape indicates a notable shift.
|Vietnam’s equity market prepared for upswing, Photo: Shutterstock
From early 2022, significant fluctuations were observed in the global capital flow as the US Federal Reserve began its interest rate hikes. Our analysis indicates a pronounced withdrawal from emerging and frontier markets, redirecting these funds towards the United States.
Between January 2022 and June this year, China witnessed an outflow of approximately $188 billion. During the same period, Vietnam faced a net outflow of around $2 billion. While this figure might appear modest, it encapsulated the global trend at that time. But by June 2023, funds started to return to emerging and frontier markets, with Vietnam seeing a particular uptick in inflows from several funds, notably exchange-traded funds.
Vietnam’s foreign investment segment predominantly leaned towards net selling over the past two to three years, despite various growth phases in the market. The situation in 2021, a year of robust market growth, saw foreign investors capitalising on their profits.
Yet, 2022 ushered in a fresh cycle as a Fed policy shift led to increased interest rates, resulting in subsequent investor withdrawals. This mirrored a global trend, where investors pulled out from emerging and frontier markets.
Given Vietnam’s premature exposure to this outflow, we anticipate its market may pull in capital sooner than other nations.
On the other hand, as domestic retail investors become the majority, they will inevitably dominate the market landscape. While foreign capital might be scant, its influence should not be underestimated. In the long run, foreign capital can profoundly reshape markets.
Countries that have been upgraded or downgraded often experience significant influxes or outflows of foreign capital, changing the entire market dynamic and luring other foreign investors. Our research within Vietnam predicts that an upgrade in its status could draw in foreign capital of at least $3.5 to $4 billion in the inaugural year.
The prospects for Vietnam to draw in capital in the foreseeable future appear promising. Macroeconomic factors, coupled with supportive governmental policies, endorse a stable developmental trajectory. The current exchange rate stability renders VND as one of the least depreciated currencies in the region, bolstering foreign investor confidence.
The government’s unwavering commitment to upgrade the stock market, the Stock Securities Commission’s determination to operationalise the Korean Exchange trading system, and the relatively low valuation of Vietnamese businesses with an attractive price-to-equity ratio all paint a favourable picture. Considering the regional ratio of MSCI for developing regions is only 13 times, compared to a global 17 times, it is an enticing proposition for foreign investors to explore frontier and emerging markets, especially Vietnam.
The trend of foreign capital inflow into Vietnam is poised to continue its upward trajectory. Currently, we believe that individual investors have a golden opportunity to cherry-pick shares from high-growth sectors, poised to benefit as Vietnam welcomes this foreign investment influx.
For instance, sectors such as industrial real estate, exports, and advanced technology manufacturing showcase promising growth potential.
Recent times have witnessed the Vietnamese government actively signing cooperation agreements with several major countries worldwide. This strategic move not only opens vast and promising markets for Vietnamese enterprises to venture globally but also positions Vietnam as an attractive hub for foreign investments. The nation is gradually being perceived as a significant production transhipment point in Southeast Asia and, more broadly, Asia.
Such endorsements and engagements undoubtedly contribute to boosting Vietnam’s economic growth. Indirectly, they also invigorate and propel the stock market’s upward momentum.
(*)Tran Anh Tuan, Head of Research, PSI Securities