Euphoria remains in check after Vietnam’s market breakthrough

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After Vietnam’s largest listed company scrapped limits on foreign ownership, analysts say other firms will need to follow before the country’s equities market truly opens up.
Vietnam Dairy Product JSC last week announced plans to remove the 49 percent foreign ownership cap on its shares. International investors have long clamored to buy more shares than what’s been available in the frontier nation to tap one of the world’s fastest-growing economies. Vietnam’s benchmark index, one of the best performers in Asia in 2016, last week touched the highest level since July.
“We’re close to a turning point for the market, but we’re not there yet,” Marc Djandji, head of institutional sales at RongViet Securities Corp. said in Ho Chi Minh City. “The question now is when it happens. There are foreign investors out there, but they can’t buy some stocks because of the limits. We need to see other large companies move into the right direction, doing the same thing.”
Widening access for global funds is key to helping the nation expand a stock market that is only around a quarter the size of that of the Philippines. The move comes as the government builds its case for an upgrade to emerging-market status. Such a ranking, which would increase the pool of eligible investors for Vietnam, requires “significant” openness to foreign ownership and ease of capital flows, as well as minimum levels of liquidity and market value, according to MSCI Inc., which classifies rankings of global stock indexes.
 
Vietnam’s government has sought foreign investment to help it achieve this year’s growth target of 6.7 percent. The economy grew 5.46 percent in the first quarter, versus 7.01 percent in the last quarter of 2015 as income from crude oil and agriculture production dropped. Foreign funds sold a net $109.3 million of Vietnamese shares this year, after being net buyers for 10 straight years through 2015.
Former Prime Minister Nguyen Tan Dung told the legislature in October that “economic reform is still slow. ” In March, International Monetary Fund chief Christine Lagarde said Vietnam risks being vulnerable to external shocks if it doesn’t push through reforms to strengthen its banking system and restructure state businesses.
Companies have been slow to act when the government in June last year issued a decree to allow overseas investors to increase holdings in certain industries to 100 percent from 49 percent. The ownership-reform plan was first proposed in 2013.
Not forced
“If the changes had been more clearly explained last September and companies encouraged to raise or remove limits, the VN Index for the past almost 9 months would already be above 750,” said Kevin Snowball, the chief executive officer of PXP Vietnam Asset Management in Ho Chi Minh City, who called Vinamilk’s move the single most important market development in almost 10 years.
Some companies have a “lack of understanding of the advisability of doing so, and it’s exactly the situation where most benefits will flow in the long-term,” Snowball said. “At no stage is anyone forced to sell their shares to a foreigner just because foreigners are allowed to buy them.”
If we are correct on the impact of Vinamilk’s action, then we would expect the market to advance toward 800 within this year.” 
For Vinamilk, its plan will see a surge in demand for its shares, which will help propel the nation’s benchmark stock gauge higher, Snowball said. Vinamilk, partly owned by a government investment arm, touched a record high last week. The stock has jumped 14 percent this year.
Market outlook
“If we are correct on the impact of Vinamilk’s action, then we would expect the market to advance toward 800 within this year,” he said.
That would the highest level since the 2008 global financial crisis. The VN Index, which came close to a bear market earlier this year, has since surged 17 percent from Jan. 21 low and trades at the highest level relative to MSCI All Country World Index since 2011.
VinaCapital Group Chief Investment Officer Andy Ho predicts the overseas investments in local shares and privatization of state firms will gather steam following Vinamilk’s move.
“This is the first significant state-owned enterprise to completely remove foreign ownership limits, and we believe this could be the start of significant momentum in foreign ownership expansion and privatization generally,” he said in a statement.
MSCI, the index provider, will on June 14 announce the results of its 2016 market classification review that may introduce sweeping changes for emerging and frontier markets, as funds shift investments tracking $1.5 trillion in developing-world benchmarks.
That decision may be too soon considering the government’s progress in its efforts to open up the market. RongViet’s Djandji says more companies need to follow Vinamilk in raising their foreign ownership limits.
“The government’s idea is to move to emerging status,” he said. “So if only Vinamilk raises the limits, it will not be sufficient.”

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